The Audit of Corporate The Audit of Corporate Reporting on the Internet: Reporting on the Internet:

Challenges and Institutional Challenges and Institutional ResponsesResponses

Andrew LymerUniversity of Birmingham &

Roger DebrecenyNanyang Technological University, Singapore

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OverviewOverview• Background• Issues facing auditors• Professional Pronouncements

– Non-auditing specific– Auditing specific

• Technological developments in reporting• Research Needed

BackgroundBackground

• Paper based periodic reports• Selected Investor Meetings• Physical AGMs/EGMs

• Investor Relations websites• Webcast Meetings• Electronic Proxy

• Interactive reporting• Video conferencing • Electronic voting

Allam IASC Allam IASC Allam IASC Allam IASC Allam IASC Allam IASC

Australia 96 53 100 20 100 23 100 17 100 17 98 7

UK 100 57 98 47 98 47 96 47 96 47 98 34

USA 98 90 98 70 98 70 92 70 90 57 96 43

Notes to Accounts Audit ReportFinancial Sum m ary Balance Sheet Incom e Statem ent Cash Flow Statem ent

Table 2: Comparison of percentages of top 50 (Allam) or top 30 (IASC) companies in geographic domains who provide key elements of an annual report on their Website for accounting periods ending to end 2001 (Allam) or mid 1999 (IASC)Source: from Table 3 Allam & Lymer, 2002 p10 and Table 6 in IASC 1999 p55

Background

Issues facing auditorsIssues facing auditors

1. Scope of Verification

Investor RelationsWebsite

CompanyWebsite

Authorised Financials

• Drawing the boundary

• Provision of wider range of information

• Depth of data

• Forward Looking reports

Issues facing auditorsIssues facing auditors

2. Functions of Verification

Financial Sta tements

Accounting System(s)

Organisat ion’s Informatio nSystem

Inter-networked O rganisation • Organisation wide information systems

• Boundaries of organisations

• Role for continuous audit?

Issues facing auditorsIssues facing auditors

3. Assigning responsibility in the audit function

• Sharing of risk v limited liability• New players in verification market

4. Justification of the statutory audit• Value added?• Cost coverage of wider audit remit

Issues facing auditorsIssues facing auditors

5. Other issues• Is the audit opinion safe from change by the client or

other party? Should the web-based auditor's report reside at the

auditor's or the client's website? What weight should be given to an auditor's report date

when documents on the web can be changed? Should the auditor allow hyperlinks to, and/or from, the

auditor's report? Auditor's report look and feel when available online The expression of authority of audit statements

What does ‘signing’ actually mean in online context?

Professional Professional PronouncementsPronouncements

1. Non-specifically auditing related regulations and standards– Securities Market Regulators

• SEC, COB, LSE, TSE• COB (2000) - calls for effective auditor

guidance or will regulate

Professional Professional PronouncementsPronouncements

– Accounting Standard Setters•IASC Discussion paper

indicating whether specific items of data had in fact been subject to external verification,

which GAAP (or GAAPs) had been so audited,

how excerpts from financial statements, and their related audit statements, should be shown if made available outside of the context of the full statements in an annual report

use of different languages

…...

Professional Professional PronouncementsPronouncements

– Accounting Standard Setters cont•AICPA/FASB

– Active groups in area eg the Jenkins Committee Report (94) and the Elliott Committee Report (96)

– 'Business Reporting Research Project’ - Jan 98» 'Electronic Distribution of Business Reporting

Information’ Jan 2000» democratisation of business reporting » changes in the reporting model » completeness of reports » timeliness» variability of content

Professional Professional PronouncementsPronouncements

- Accounting Standard Setters cont

•ASB'Year-end Financial Reporting Structure'

projectDiscussion Paper February 2000

Standards for Internet reporting?

Professional Professional PronouncementsPronouncements

- Other Groups• ICAS - ‘Business Reporting - An

Inevitable Change?’ – Database reporting model– Audit processes instead of outputs– Different assurance levels for different levels of

data– Better understanding of use of non-financial

indicators– Demand for wider assurance services– Skills base to deliver wider range of services

Professional Professional PronouncementsPronouncements

- Other Groups cont.– ICSA Best Practice Guide for Electronic

Shareholder Communications - March 2000• Form of the audit report when delivered online?

– UK Electronic Communications Act• May 2000 - effective December 2000• All forms of shareholder communications can be electronic• Voluntary reporting becomes statutory fulfillment?

• Early to see full effect

Professional Professional PronouncementsPronouncements

2. Auditing StandardsTrend -

1. Ignore online reporting as solely communication medium (USA)

2. Changes the whole nature therefore too big to handle (initial UK)3. Pick up bits where guidance can be offered (Australia and recent UK)

Professional Professional PronouncementsPronouncements

2. Auditing Standards cont– USA

• AU550 (SAS 8 interpretation) March 1997• Website not equal ‘other documents’• Auditors can ignore• Various AICPA task forces and panels monitoring

position• Practice Alert 97-1 (current)

– AU550 still valid– Boundaries around audited information necessary

Professional Professional PronouncementsPronouncements

2. Auditing Standards cont.– Australia

• AGS1050 - December 1999• clarity over responsibilities• need for specific auditor training• presentation of audited v unaudited data

– not displayed together

• referencing and signatures• active monitoring of audit report use• special reports for selective info presentation

Professional Professional PronouncementsPronouncements

2. Auditing Standards cont.– UK

• Bulletin 2001/1 ‘Electronic Publication of Auditors Reports’ - Jan 2001

• reflects many of AGS1050 issues for UK• BUT audit report should be largely common for all

reports plus• dating still valid (no evergreen reports?)• responsibility for checking conversion from audited

manual to electronic

Technological Technological Developments in Developments in reportingreporting

In fo rm atio n u se In fo rm atio n u se

F le x ib il ity F le x ib il ity

R e u se R e u se Sin gle U se Sin gle U se

Stat ic Stat ic

Dyn am ic Dyn am ic

H T ML H T ML

XML XML

C D C D - - R O M R O M

A d o b e A d o b e A c ro b at A c ro b at

In te llige n t In te llige n t A ge n ts A ge n ts

P u sh P u sh

XBRLXBRL

AccountingSystem

AccountingSystem

OtherSources

OtherSources

XBRLXBRL

InvestorsInvestors

OtherParties

OtherParties

XBRL: The Standard for Publishing XBRL: The Standard for Publishing and Distributing Financial Informationand Distributing Financial Information

PrintedFinancialsPrinted

Financials

RegulatoryFilings

RegulatoryFilings

WebsiteWebsite

TaxReturnsTax

Returns

BankFilingsBankFilings

Generation Interpretation

Research Needed Research Needed • Examples :

– Actual Usage • e.g. how companies using audit reports in conjunction

with online information

– Judgment Studies• users influenced by verification process when reports

online?

– Demand for Assurance Services• what demand exists?• Funding models?

– Impact of Legislation Changes• ECA etc

ConclusionConclusion

• Online reporting common • Move from voluntary to statutory• Traditional audit techniques may be of

reduced use• Need for useful guidance becoming

important• Bigger technological issues on the

horizon to be addressed