The amount of non-financial information in annual reports has grown substantially in the past ten years with questions being raised regarding the reliability of the information that companies include at the front of these reports. More recently, there have been calls to expand the information provided with further reporting on Corporate Social Responsibility (CSR), Sustainability and the risks faced by the business.
The benefits of increased communication of non-financial information are well-publicised with perhaps the most important being it satisfies user’s demand for more information about the non-financial performance of companies and their future prospects.
This increased demand for reliable information could see the financial auditor's role expand to give greater assurance on the narrative content of annual reports, including assessing CSR reporting and whether the statements made reflect the policies and procedures adopted in practice by the entity.
All things being equal, increasing the responsibilities of the auditor to assess the reliability of these narrative disclosures will inevitably result in an increase in the cost of an audit. Moving into new non-financial areas will require the use of specialists in these fields and additional training for existing personnel. There is also a significant issue around the sharing of risk between the auditor and external specialists. Then there's the classic bugbear of such changes adding another level of regulation at a time when businesses want less, not more, red tape.
Despite these challenges, we think it is important to flag reporting on non-financial information as a difficult, but increasingly important, area that requires more clarity around the auditor's role. RSM International provided feedback to the European Commission regarding the non-financial reporting in its submission on the EC Green Paper: Audit Policy – Lessons from the Crisis and will continue to actively participate in this debate as it develops.