Print Edition
      December 2009
Email    Print    Feedback

No easy task

By Rafal Kuczynski
Illustration: Jason Schneider

The changeover to IFRS is a major challenge, but it’s also an opportunity for audit firms to review their procedures

With 2010 weeks away, many public companies are preparing for the changeover to international financial reporting standards (IFRS). Management teams, audit committees and IFRS committees are busy ensuring the transition will be effective and efficient.

And the changeover is no easy task. Its success depends on the availability of adequate tools and resources, as well as a considerable investment of time and money on the part of management.

This is also true for auditing firms. The transition will mean a major shift in how audit engagements are managed and will call for a substantial combined effort and focus. To avoid unpleasant surprises, firms need to review their audit approach in light of the risks inherent in IFRS conversion. They will also have to cope with unexpected challenges, control costs and minimize the risk of potential lawsuits or possible adverse effects on their clients' day-to-day activities.

The European experience — lessons to be learned
The IFRS conversion process in Europe encountered a number of problems — even failures in some cases — despite the good intentions of all the stakeholders involved. Studies have shown that difficulties arose when companies and their auditors:

These weaknesses resulted in incomplete, nonrelevant or inconsistent financial statements and unforeseen additional costs. The profession needs to take the task ahead seriously and learn from the European experience to avoid making the same mistakes.

Planning — crucial for an effective transition audit
The changeover to IFRS in Canada represents a fundamental shift in financial reporting. Changes in the application of new policies, the configuration of systems and maintenance of internal controls will all have an effect on audit risk, significantly increasing the risk of misstatements and fraud. In turn, this will have a considerable impact on how audits are conducted. That’s why it’s important to properly plan the engagement — a step that everyone agrees is the key to a successful transition.

Planning should focus on two major areas: assessing and updating the knowledge of professionals; and participating in the company’s conversion process.

Continuing education and core resources
The conversion process should start with intensive and ongoing IFRS and International Standards on Auditing (ISA) training for key audit and review personnel.

During the switchover in Europe, the role and involvement of auditors in the conversion process were often questioned. Surveys have shown that many companies accused their auditors of being slow to identify technical and reporting issues and of failing to meet deadlines, primarily because they were ill-prepared and lacked the necessary knowledge.

To optimize effort and make the most of their investment, firms should consider hiring or teaming up with recognized IFRS specialists to assess the quality and relevance of training programs offered by consulting firms.

To be useful, training should not only address the technical and theoretical aspects of the conversion but should also cover practical issues adapted to the Canadian regulatory environment and specific characteristics of the industry in question.

And don’t forget professionals and specialists whose expertise is needed at certain stages of an audit engagement. These include IT professionals, tax practitioners, valuators, risk management consultants and others who should provide assurance that they can and will do the job well.

Users’ concerns and professional risk
One thing is certain: the first IFRS financial statements will be closely scrutinized by the various stakeholders, including financial backers, investors, market analysts and regulators. As was the case in Europe, all these stakeholders are concerned about the impact the changes will have and the risk that the standards will be applied inconsistently.

And these concerns are well-founded. Unlike Canadian GAAP, where certain complex accounting treatments are closely modelled on US rules, IFRS is based on much looser and more general principles, which leave more room for interpretation and the exercise of judgment and therefore lead to greater subjectivity in the application of an accounting treatment or standard. In some cases, there is no IFRS equivalent to the current Canadian standards. This issue and its impact on audit engagements will naturally need to be addressed.

Just as they have to support the application of an accounting policy or the selection of a specific IFRS standard by an analysis demonstrating its relevance, auditors who settle on a Canadian standard will need to be reasonably certain that it complies with the overall conceptual framework governing IFRS and justify its application by clearly documenting their conclusions.

In their risk assessment, auditors should also consider the possibility of figures being manipulated by management. The changeover is a convenient opportunity to embellish the results and financial position or to conceal previously undetected errors in the opening balance adjustment.

Early in the planning process, auditors should identify the files that present the greatest risk, either because of their complexity, major differences between Canadian GAAP and IFRS, or characteristics specific to certain Canadian industries where few IFRS equivalents exist. This will enable them to take the necessary precautions to ensure the audit is properly performed.

Obviously, vigilance and professional skepticism should be the watchwords of the day.

Management’s transition plan: key audit evidence
The active involvement of auditors in all stages of the planning, development and implementation of the company’s conversion process is critical to the engagement and essential to their work and conclusions, given the extent of the change, the high level of professional risk and the potential adverse effects inherent in the process.
The objectives of the auditor’s approach are:

Auditors will therefore need to assess the soundness and relevance of management’s transition plan and make certain the client has identified all risk areas. In addition, they will need to understand and analyze the appropriateness of decisions, interpretations, assumptions and significant choices made when applying specific standards and accounting policies. They will also have to ensure that all decisions are supported by sufficient analysis and explanations confirming compliance with IFRS. Finally, auditors will need to understand the impact of the changes on information systems and accounting processes in order to determine the overall audit strategy required, the specific auditing procedures and the timing of their application.

Particular attention should be paid to differences that seem negligible at first glance or to features that appear similar. It is easy to identify standards that have obvious differences, such as tangible capital assets and impairment tests. However, many differences that have a significant impact on the recognition, measurement and assessment of a transaction require a detailed analysis of a particular IFRS, for example, as regards the interpretation of concepts, definitions and terminology.

Information and accounting systems
The European experience clearly shows that the critical factor in the changeover to IFRS was the process of adapting and reconfiguring information systems and updating internal controls. To meet the new transaction processing and financial reporting needs and requirements and to ensure the quality and reliability of information, current systems will have to be substantially revamped or entirely replaced.

Given the risk associated with a conversion and the possible impact of the changes on audit strategy selection and on the nature and extent of specific procedures, auditors will need to be actively involved in the various stages of the information systems conversion to reduce control risk to an appropriate level. Obviously, some audit procedures will only be able to be performed during the conversion.

What’s more, auditors will have to understand the changes made, evaluate the controls introduced during the conversion process, assess their impact on their procedures and determine which tests are necessary to ensure that both general and application controls are appropriate.

Finally, auditors should be able to answer the following questions.

Remaining independent
The need for auditors to actively participate in the transition process could lead to certain problems of independence, since clients will ask them to provide opinions, advice and recommendations about the company.

To enforce the rules of professional conduct respecting in-dependence and to avoid placing the auditor in a real or perceived conflict of interest situation, both the company and the audit committee will need to put processes in place to define the extent of the auditor’s involvement and collaboration with the management team.  

Conclusion
The changeover to IFRS is a major challenge, but it is also an opportunity for audit firms to review their programs, procedures and practices to make them more effective and efficient. Like any major shift, the changeover will not be easy and will require considerable resources and time. Good planning will be crucial to cope with the obvious increase in workload and to maintain the quality of services offered. It is our job as auditors to be prepared.

Rafal Kuczynski, CA, is a manager at the Montreal office of RSM Richter Chamberland

Technical editor: Yves Nadeau, audit and risk management partner, RSM Richter Chamberland in Montreal