How international auditing changes will affect Australian market
In a special GAAP Consulting report, auditing and professional standards consultant Justin Reid (GAAP) and corporate and commercial lawyer Stephen Newman (Hope Earle Lawyers) discuss ramifications of changes to international and Australian standards on reporting and, in particular, the introduction of key audit matters.
What has changed?
According to the report, the auditing world changed on 15 January 2015, when the International Auditing and Assurance Board (IAASB) issued its new and revised suite of reporting standards (and conforming amendments to eight other standards), “heralding the biggest change to an auditor’s role in living memory.”
Reid and Newman say the most controversial and game-changing addition —key audit matters (KAMs) —will be mandatory for listed entities and voluntary for other entities.
From the matters communicated with those charged with governance, the auditor is required to determine those matters that were most significant in the current period and report them. When describing KAMs, an auditor is required to include:
- Why the matter was considered to be one of the most significant;
- How the matter was addressed in the audit; and
- A reference to the related financial statement disclosure.
“The impact of including KAMs within audit reports is likely to be significant for management and those charged with governance. For listed entities, imagine the prospect of their auditor ‘commenting’ publicly about significant matters addressed during an audit period,” the report says.
Meanwhile, the report says the impact of the changes on auditors cannot be underestimated. “Not only will there be a very different looking audit report, but the dynamic of the client/auditor relationship will be forever affected. Standard auditor reports will no longer exist. They will be replaced by longer documents that contain more detail. They will be more descriptive, include subjective wording and be more open to interpretation than the auditor might have intended.”
Legal issues and considerations
Newman says the following issues below should be taken into account:
- Auditors should review their professional-negligence insurance policies to see whether any change in policy wording and cover are required;
- Auditors should review their engagement letters to determine whether they should be changed, particularly with respect to liability issues.
- Auditors should remember that they have only qualified privilege for what they say in an audit report;
- By having to “say more” in an audit report, will auditors be handing extra ammunition to class action and other lawyers and encourage more disputes and litigation with clients and third parties?
- Will auditors have to engage lawyers to review what they say in audit reports about KAMs and other matters of opinion, including the “close-call” scenario, to ensure that they are on the “right side of the line”?
Expected effects on auditors
The report lists some of the expected effects on auditors including:
- Increased time and cost associated with the determination of KAMs;
- Increased risk that the audit report might be taken out of context when read without financial statements;
- The more that is said, the more it may be misinterpreted; and
- When it comes to reporting on KAMs, significant matters will not be easy to summarise.
What’s next for the Australian market?
The Auditing and Assurance Standards Board (AUASB) has agreed to adopt the IAASB’s effective date for the new audit reports for financial-reporting periods ending on or after 15 December 2016. In reality, the first reporting period commencement date is likely to be 1 January 2016.
The AUASB is yet to release its exposure draft on the changes, but consultative meetings during April are likely to contribute important feedback, and an exposure draft is expected shortly.
The GAAP report says it is “not improbable” that Australia will see a different scope for the mandatory application of KAMs. It also says Australia may decide upon a narrower scope than simply “listed” entities and may restrict mandatory reporting of KAMs to top-200 entities.
Once the AUASB releases more information on how international changes will affect Australia, auditors will then need to start the communication process with clients affected and turn their attention to procedures to meet the new reporting requirements.
BVWire–Australia will report on the changes as they roll out.
The GAAP report can be accessed here.
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NAB monthly business survey reveals low confidence levels
Business confidence was at relatively subdued levels in April, according to NAB Monthly Business Survey, which was released in mid-May.
The survey says that, until confidence lifts significantly, it is difficult to see a sustained economy recovery developing. “To date, rate cuts have not appeared to do much and it will be interesting to see what, if anything, [the] Federal Budget will do.”
The wholesale industry recorded the largest deterioration following a surprisingly strong improvement in March, while construction had the next largest drop. However, conditions in the latter remain positive, with a pipeline of construction activity coming up.
While less negative than in the past, confidence in the mining sector remained the weakest, along with finance, property, and business.
Domestic forecasts for growth are at 2.3% for 2014-15 and 3% for 2015-16. The survey says the economy is “still struggling to offset the impact of falling mining investments on domestic demand,” while low commodity prices are also crunching income flows and government finances. “Further falls in the AUD should help offset weakness in commodity prices.”
The biggest concern remains the weak intentions toward business investment. “The RBA’s rate cut in May was a line-ball decision in our view, but with partials improving and inflation expected to remain relatively subdued, the RBA is likely to remain on hold for some time, unless unemployment raises more than expected.”
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What the experts say about control premiums
A new special report from Business Valuation Resources on control premiums presents both qualitative commentaries and case studies from numerous experts who address these issues.
The report, Update on Control Premiums: What the Experts Say, includes all the necessary quantitative considerations along with coverage of the controversies about the concepts and data, presenting all sides of the argument.
In addition, the special report offers a chapter with analysis from the Factset Mergerstat/BVR Control Premium Study, as well as an entire section that presents many state and federal court cases —specific to the U.S. but with many parallels to the Australian BV industry —that deal with control premiums, discounts for lack of control, and more. The cases span a wide array of business valuation purposes including bankruptcy, dissenting shareholders, estate and gift taxes, and marital dissolution cases.
Business Valuation Resources’ special report comes on the back of Halligan & Co.’s Control Premium Research 2014, a paper that was released last year to help business valuation practitioners ascertain the value of control in a company.
The paper underlines the fact that voting rights attached to the controlling shareholder’s interest are often the main source of control. However, elements of control may also come from other specific contractual rights in a shareholders’ agreement. According to the paper, control is commonly exercised by passing resolutions at shareholder meetings and by determining the composition of the board of directors.
Download Control Premium Research 2014 here and see the 3 December BVWire–Australia for more on the study.
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Valuations in China have evolved with the economy
We recently caught up with a number of business valuation professionals from China at the 2015 International Valuation Forum in Atlanta, GA (U.S.), which was sponsored by the International Association of Consultants, Valuators and Analysts (IACVA). Madame Liu Ping (China Appraisal Society), vice chairman of IACVA, addressed the group, and Yonghua Ruan (China Enterprise Appraisal) gave a presentation on brand valuation.
Xiaohong Li (China Appraisal Associates) told the audience that most business valuations in China are done by very large firms. In the beginning, valuations were performed using only the cost approach, but now all three methods are used. There are 30,000 valuation professionals in China, and different licences are granted for valuing state-owed assets and public companies. Valuators play a big role in M&A of state-owned assets.
According to Li, the Chinese economy has now evolved into a “new normal” and now focuses on innovation and Internet-related technology. Companies have moved from heavy investments in fixed assets to intangible assets and technology. Therefore, valuation engagements have become more complicated.
There is also a ministry for quality in China, known as the Quality Assessment Board, which seeks to put a value on brands, so consumers will be able to identify the quality difference between one brand and another.
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Preview of the July issue of Business Valuation Australia
Business Valuation Australia (BVA) keeps you up-to-date on the latest patterns and trends in business valuation with analysis of new methodologies, regulatory and standards updates, and much more. The next issue of BVA releases soon. Here is what you have to look forward to:
- Valuer’s Q&A Corner: Experts answer questions to some of valuation’s most puzzling questions and give practical advice on a wide variety of topics. In July, Richard Stewart (PwC) covers how the standard of value affects discounts and premiums.
- Valuation in the context of an industry that is volatile: Exploring the many challenges that are unique to industries that are constantly evolving, Ian Jedlin (KPMG) outlines the aspects business valuators should watch out for and how to safeguard against them.
- Complete breakdown of KPMG Valuation Practices Survey (BVA editor): The last issue of BVA featured summary findings from the KPMG Valuation Practices Survey. This month, we explore outcomes in depth and analyse their impacts on the BV industry.
- Update on Australia Q1 2015 Capital Markets: S&P Capital IQ outlines the Q1 2015 M&A summary and breakdown for Australia, global stock market performance, and Asia Pacific IPO trends.
- Snapshots of the business valuation profession around the world (BVA editor): Business valuation practitioners around the globe give an overview of BV practice in their countries. You’ll be surprised at what they reveal.
Don’t miss the July issue. Subscribe to Business Valuation Australia now.
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