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.
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.
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.
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.
The changeover to IFRS is a major challenge, but it is also an opportunity for audit firms new accounting opportunities for students who are considering the profession.
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