Twas brillig, and the slithy toves

Did gyre and gimble in the wabe:

All mimsy were the borogroves,

And the mome raths outgrabe.

 

How fitting, that
the Victorian era in which the independent auditor’s report was invented also
brought forth Charles Dodgson’s unique combination of mathematical genius and –
as Lewis Carroll of Jabberwocky – his
verbal acrobatics.

So I thought,
reading the new language requirements of the Financial Reporting Council, the
British audit regulator, in its revised ISA 700, “The independent auditor’s report on financial statements”.

Life was once so
straightforward. In the 19^th century, Mr. Deloitte’s pioneering
report on the half-yearly accounts of the Great Western Railway at December 31,
1850 read, in its crisp entirety, “Audited
and approved”.

This month, while
the Public Company Audit Oversight Board in the US, the European Commission in Brussels and the International Auditing and Assurance
Standards Board on the
global front continue mired in endless projects aspiring to evolve the standard
report, the FRC’s vorpal sword has gone snicker-snack. 

It strikes one
successful blow, at least – against one of financial reporting’s great
historical opacities. The new British ISA requires that the audit report’s
description of the assessed risk of material misstatement must:

“Provide
an explanation of how the auditor applied the concept of materiality in
planning and performing the audit. Such explanation shall specify the threshold used by the auditor as being materiality for
the financial statements as a whole…” (emphasis added).

It has forever been
a mystery why financial statement users have tolerated a reporting and
assurance model, the scope of which is designed “to give reasonable assurance
that the financial statements are free from material misstatement…”, without a
clue from either issuers or auditors as to the magnitude or contours of the
term “material.” 

At last bringing
sunlight and transparency to the question of “how big is big?”, the ISA invites
specific amplification, for example, of categories of items having lower
materiality levels, materiality thresholds for reporting unadjusted differences
to the audit committee, and qualitative considerations relating to the auditor’s
evaluation of materiality (¶ A13B). 

In the
disclosure-oriented environment of the American securities laws, it would seem
plain beyond ambiguity that putting such information in the hands of investors
is to welcome them into the circle of the better-informed – with, no small
matter, a concomitant imposition of responsibility for their own absorption and
analysis of the information.

That’s on the plus
side. Not so promising, the requirement that an unqualified auditor’s report –
which must “clearly state that the financial statements give a true and fair
view” (¶ 18) – explicate the assessed risks, materiality and audit scope, in
language that must be “related directly to the specific circumstances of the
audited entity and … not, therefore, generic or abstract matters expressed in
standardized language” (emphasis added).  

Charles Dodgson may
have been able to integrate quantitative and verbal competence back in 1872.
But expecting linguistic agility from today’s number-crunchers is a stretch too
far.

For proof, the
FRC’s own admonition on risk disclosure (¶ 19(A)(a)) is a sufficient example,
as it stumbles in ponderous violation of the norms of style, punctuation and
syntax:

“Describe
those assessed risks of material misstatement that were identified by the
auditor and which had the greatest effect on: the overall audit strategy; the
allocation of resources in the audit; and directing the efforts of the engagement
team…” 

A better idea would
be to tap the centuries of exquisite poetry and soaring rhetoric in the
country’s grand verbal heritage. The phrase “true and fair view” has always
seemed, after all, to resonate in its English-ness – as if any issues of
clarity or sufficiency should be subject to gentlemanly resolution on the
playing fields or over brandy and cigars in the lounge back at the club.

So here would be a
few precedential examples for a descriptive accounting and audit vocabulary in
non-generic, non-standardized terms:

• On the
  deferral of executive incentive compensation: “The rule is jam tomorrow and jam
  yesterday but never jam today.” 

• On the
  difficulties of a protracted corporate reorganization: “Now is not the end. It
  is not even the beginning of the end. But it is, perhaps, the end of the
  beginning.” 

• On the
  impending threat of a bankruptcy filing: “It was a dark and stormy night.”

• On the
  choice of aggressive accounting principles by which to value a derivatives
  portfolio: “I know a bank where the wild thymes blow.”

• And,
  perhaps best of all, on the possibility of a going-concern qualification: “To
  be, or not to be: that is the question.”

Readers are invited
and encouraged to bring forward their own suggestions.

 

Thanks for joining this dialog. Comments are
very welcome, and subscription sign-up is easy and free, both on the Main page.