Investors welcome auditor transparency on materiality and seek improved explanation
12 December 2017
Uniquely in the UK, auditors report publicly on the materiality threshold applied to focus their audit work, disclosing what level of misstatement or omission they consider matters to users of financial statements. Investors welcome this transparency according to the latest thematic review (PDF) from the Financial Reporting Council (FRC).
Audit committees are increasingly engaging with the auditor to understand and agree the materiality threshold used. Investors and audit committees would like auditors to go further in their communications, explain the rationale and impact on the focus of the audit when the materiality threshold is higher than industry norms; uses alternative performance measures as a basis; is lower in the face of internal control weaknesses or has been tailored for specific items and balances.
Today’s report follows up a thematic review in 2013 before the transparency requirements were introduced. The FRC found that audit firms have improved their methodologies and guidance, particularly for certain industry sectors and first year audits.
It remains the case that the differences in methodology, guidance and their application can result in very different thresholds between audit firms. Auditors are therefore encouraged to be more specific with audit committees and in their public reports about the materiality judgements they have made and the impact on the scope, nature and extent of their audit work. The FRC report also highlights key messages for audit committees and audit standard setters.
Melanie McLaren, FRC’s Executive Director for Audit and Actuarial Regulation, said,
“In future with technological advances the importance of materiality may reduce as companies and their auditors become able to more cost-effectively, and accurately, interrogate and adjust financial information. However this is not yet the case.
"Today, the assessment of materiality drives the scope, nature and extent of the auditor’s work. Appropriate quantitative and qualitative assessment of materiality affects audit quality. We are pleased to see the audit firms take action following our 2013 thematic review. Auditors should be encouraged by investor feedback on the transparency afforded by UK extended auditor reports and redouble their efforts to communicate the reasons for and implications of the materiality threshold applied in specific audits.”
Notes to editors:
The Financial Reporting Council’s (FRC) mission is to promote transparency and integrity in business. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
Materiality is a level above which information could influence economic decisions of those who use the financial statements and is a key part of the audit process.