The Impact of Change: Good or Bad for Accounting?

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There have been quite a few changes applied to the accounting profession in regards to the new Canadian and US standards in the previous years. Also, there are going to be changes applied in the future such as the conversion to International Financial Reporting Standards (IFRS) in 2011, the switch to Canadian Auditing Standards (CAS) and the switch to Canadian Standards on Quality Control (CSQC 1) which is replacing the current General Standards of Quality Control for Firms Performing Assurance Engagements (GSF-QC). CASs are coming into effect for periods ending on or after December 14, 2010 while CSQC 1 is effective December 15, 2009 (Ho Ng, 2009). There will be 36 International Standards on Auditing (ISA) included in the new CASs and they will need to be adjusted for Canada (Stevens, 2009). To be successful in implementing these changes as smooth as possible, many businesses will find it costly and time consuming. Most of the large firms will have the resources available at hand to complete the preparation, planning and training recommended for the required changes. However, many of the smaller firms will be struggling with the costs and time needed for this transition and therefore may suffer an information overload. Auditors should start preparing as soon as possible for the transition to allow plenty of time to familiarize themselves with the ISAs and the CASs (Buckstein, 2009). The more time allocated to this transition will decrease the amount of stress and frustration from the employees within the public accounting firms. There will be many significant areas of change resulting from the transition to ISAs. This will entail plenty of focus, preparation and patience from the auditors.

The first includes the transition from GSF-QC to CSQC 1. The Canadian Auditing and Assurance Standards Board (AASB) has decided to adopt from ISA a modified version of one quality control standard. This quality control standard will be applied only to assurance engagements. This new system will be of a benefit because it will allow public accounting firms to display their dedication to quality control (Ho Ng, 2009). It is of great importance for the firm to understand this as it will help ensure the quality of the work done for their clients. This transition includes two major aspects that are of importance.

The first one requires that the Engagement Quality Control Reviews (EQCR) be finished considerably before the audit report date (Ho Ng, 2009). The decision to this change was generated using CAS 700 (Ho Ng, 2009). Regarding this change along with the change to CSQC 1 may bring the dates of the report and issuance closer together. In some cases, the engagement report date may be much earlier than the issuance date and for those firms they will require a change in practice when implementing the new CSQC 1 (Ho Ng, 2009).

The second requires that the file monitors be independent of the firm when performing quality control reviews (Ho Ng, 2009). The EQC reviewer must not be part of the firm's engagement team. Therefore, CSQC 1 provides a more precise suitability when it comes to inspecting the completed engagements. This will affect many of the smaller firms because they will now need to hire an external professional to review their EQC (Ho Ng, 2009). Another option for the smaller firms is that they can smooth the progress of these monitoring functions by arranging with other organizations to allocate their resources (Ho Ng, 2009). This will be an added cost and professional consideration to the two partner firms and sole practitioners. An EQCR will assist in reducing the amount of inappropriate reports issued as well as prevent threats to independence.

Firstly, there was a change made referred to as the new CAS 200. Currently, auditors are reporting on compliance with Canadian Generally Accepted Accounting Principles (GAAP). The new CAS provisions states that auditors are going to be permitted to use any acceptable financial reporting framework to give an audit opinion on the financial statements (Stevens, 2009). However, management may need to present specific disclosures outside of what the framework requires to explain their reasoning. Along with deciding upon using different acceptable financial reporting frameworks, the auditor is required to use their professional judgment while doing so (Buckstein, 2009). This will certainly affect public accounting within firms as well as the auditors within the Canada Revenue Agency (CRA). The auditors will need to know or be familiar with the framework in order to understand it. If they are not able to understand the dissimilar financial framework, they may find it more difficult to perform their duties that are required of them and therefore may become frustrated. Consequently, this transition will cause the auditor to spend more time trying to understand and figure out the new financial framework that they are approached with. Therefore, this increase for time used to figure out the framework will cause for an increase in expenses to the businesses because of the extra hours that the auditor will require to do this. In conclusion, for the CRA staff, it means more training, which means more taxpayer dollars will be wasted. The audits will also take a longer period to complete; it may also generate a more broad scope if uncertainties develop within the audit review. In addition, the point of an audit at CRA is to generate new collectible tax dollars, not give it back. Furthermore, this again will be passed down the clients, as their audits will cost more.

A significant change made was the new CAS 570 - "Going Concern." There is no Canadian standard as of right now similar to the new CAS 570. The going concern assumption evaluates the entity's financial statements for that period and will predict whether the entity is able to continue in the subsequent twelve months (Beaudin, 2009). Currently, there is not a special section dealing directly with this issue but because of the economic downturn, this issue has become more serious. As of now, when there is a concern about whether the client is able to survive there will be suggestions made about the going concern assumption (Buckstein, 2009). The new CAS 570 will entail the auditor to perform specific duties relevant to the going concern assumption. This will include reviewing the management's evaluation related to the going concern assumption. The auditor will need to review the financial statements if there is a material uncertainty to see if they include the hesitation on whether the entity is able to continue as a going concern (Beaudin, 2009). As well, the auditor should verify what management's plans are to treat the going concern and its possible effects (Beaudin, 2009). This will affect the public accounting firms because the auditors will find it difficult to be truthful in wording of management's style of going concern. An effect is that the accounting firm may lose their client if the client does not agree with what the auditor has assumed about the management's evaluation. A scenario to consider would be an audit of a publicly traded corporation, where a number of shareholders require audited financial statements to make their decision on investment strategies. If the auditor indicated on their audit report that this entity was following the going concern principle but went bankrupt 6 months later due to poor management, will these shareholders be able to sue the auditors for the audit report that they relied on? Shareholders are a third party to the auditor and therefore are not the clients of the auditor. The Ultramares Doctrine says, "Ordinary negligence is insufficient for liability to third parties because of the lack of privity of contract between the third party and the auditor" (Arens, Elder, Beasley, Splettstoesser-Hogeterp, pg. 92). However, since every case is different this may not always be the case so there are five defenses that the auditor may use against third-party suits. They include "duty of care, absence of misstatement, non-negligent performance, absence of casual connection and contributory negligence" (Arens, Elder, Beasley, Splettstoesser-Hogeterp, pg. 94). Therefore, the new CAS section will assist Canadian auditors on appropriately dealing with matters related to the going concern section by providing them with stronger requirements and guidance as than with the previous standard.

There is an important new requirement included in the new CAS 600 - "Special Considerations - Audits of Group Financial Statements." This new standard will have an abundance of theories and changes, therefore demanding addition work as compared to Section 6930 (Beaudin, 2009). This will impact the public accounting within different organizations as "this CAS provides more explicit and extensive requirements on the consolidation process, subsequent events, and communications with component auditors, management and those charged with governance of the group" (Beaudin, 2009). For example, if the consolidated entity has an auditor not included in all of the key sections (Beaudin, 2009).

The change adopted from ISA 700 contains a considerable amount of wording and structural changes regarding the audits report. The following new standard requires that the management and auditor report their responsibilities under separate headings in the audits report (Stevens, 2009). These headings will be placed after the introduction and before the scope paragraphs. The management's responsibility section should describe the responsibility of management in preparing the financial statements (CICAHB, CAS 700). As well, they must decide upon the appropriate internal controls necessary to prevent material misstatements on the financial statements from fraud or error (CICAHB, CAS 700). Under the auditor's responsibility section it will state that an auditor has expressed their opinion based on the audit of the financial statements and will state that they performed their audit in accordance to Canadian generally accepted auditing standards (GAAS) (CICAHB, CAS 700). It is also stated that the auditor will evaluate the company's internal controls by obtaining enough evidence from the suitable audit procedures (CICAHB, CAS 700). The impact of this change to the public accounting firms is that it will require more responsibility from the auditor to gain a better understanding of the client's business while collecting evidence to evaluate the company's internal controls. In doing this, you may be able to decrease your control risk. This will result in a greater cost while doing this that will be passed down to the client.

Another change involves the date required on an auditors report. Currently auditors are using the date when their work has been significantly completed (Beaudin, 2009). However, under the new standard it requires that the date cannot be any earlier than the financial statements that have not been approved (Beaudin, 2009). Therefore, the auditor must wait until the individual(s) that are accountable for preparing those financial statements have given their approval. This in some cases will cause a later audit report date than it currently is and in conclusion, subsequent events will have to be audited in-between the financial statements effective date and the audit report date (Buckstein, 2009). This will comprise a significant change because it could require additional work to be done hence delay the audit's close off processes (Buckstein, 2009). Therefore, this difference in changes may extend the period of audit work causing the audit to be longer and increasing the costs anywhere from as little as 1% to as much as 10% depending on each separate case (Buckstein, 2009). This impact can further affect the public accounting firm's clients as well. This is because the increases in cost of an audit will most likely result in an increase in the price charged for the client's audits. In addition, it may make the audit more difficult to finish depending on how quickly the financial statements have been approved. If the auditor's are left waiting for these financial statements they may become impatient or frustrated that they cannot finish their audit. Therefore, this in turn will effect management of the entities being audited, as they will need to approve their financial statements for audit quicker than before.

A further transition that will take place on December 14, 2010 includes the new CAS 705 - "Modifications to the Opinion in the Independent Auditor's Report." This new section provides changes in content wording of an auditor's report (Stevens, 2009).

The auditor should refer to the modified opinion in the engagement letter (CICAHB, CAS 210). This new section will affect the profession of public accounting by requiring the auditor to collect more evidence on their client's entity to be able to issue an unmodified opinion. It will require that the auditor is up to date with the new titles of the audit's report and requires the auditor to understand the appropriate definitions of each of the titles.

Another significant change is the new CAS 706 - "Emphasis of Matter Paragraphs and Other Matters Paragraphs in the Independent Auditor's Report." This section is where the auditor is entitled to report a matter of importance to users of the financial statements. In addition, the auditor may place any other appropriate material that is relevant to the users understanding of the audit. The auditor will include the Emphasis of Matter paragraph preceding the Opinion paragraph and must have obtained enough evidence to support that the financial statements are not materially misstated. The auditor will include an Emphasis of Matter paragraph if there is a pervasive effect caused to the financial statements due to a new accounting standard that has been applied in advance (CICAHB, 706). In addition, the auditor will include disasters and litigations that have a consequence on the entity's financial position (CICAHB, 706). An important fact to note is that this paragraph does not affect the opinion made by the auditor. The Other Matter paragraph is also included following the Opinion section of the auditor's report and sometimes its placement will vary depending on the information that needs to be included. An item that the auditor could include in the Other Matter paragraph is an explanation of why they were not able to withdraw from the engagement even though there may have been a limitation of scope during the audit (CICAHB, CAS 706). More items include if the auditor used more than one set of financial statements and issued a report, or if the following report is not meant for other parties and therefore should not be distributed (CICAHB, CAS 706). A detail of importance to note is that the Other Matter paragraph should not include management information. This new standard will affect a public accounting firm greatly. For example if the audit report referred to an application of a new accounting standard and it showed higher numbers on the financial statements the shareholder may be mislead into thinking the entity is doing better and purchases more stock when in fact there wasn't a change at all. The public accounting firm may lose their clients after including such events because the client may not have wanted this information to be exposed to the public. Therefore, this could ruin a corporation due to the difficulties they may have in attaining new shareholders or just maintaining their current shareholders. In addition, sole proprietorships may try to avoid being audited if they feel that there is something they do not want being revealed to the public.

Lastly, there are the new CAS 315 and CAS 330 each representing a relation to assessment of risk. Currently, these rules have been in Canada and therefore the new rules will not have much of an impact. The public accounting firms should be currently following the AASB's risk assessment requirements and will not need to change much (Buckstein, 2009). As for the firms who are not abiding by these rules there will be a greater transition for them as opposed to the firms who are (Buckstein, 2009). These standards will need to be treated differently in respect to the size of the organization, for example, if the organization is large assessing the risk becomes more difficult and more in depth as opposed to a smaller organization.

A decision that may interest a sole proprietor may be whether to incorporate their business. There are many advantages for taking this approach, which include "a separate legal entity, limited liability, lower corporate tax rates, greater access to capital and continuous existence" (Industry Canada, 2009). Some disadvantages may include "higher start-up costs, increased formalities, and a more complex structure" (Industry Canada, 2009). Will this be of an advantage to the sole proprietor to make this move before the transition of CASs? There are many reasons as to why this may be an advantage to the sole proprietor. The main reason being that the individual will not be liable for the debts made by the company. Corporations as a whole are an advantage during this transition because they will have the funds or be able to have access to a greater amount of capital to afford the costs in preparing, planning and training for this transition.

These changes may not seem relevant for a client to inform himself or herself, however the client should become aware of the many changes to take place in the next couple of years. These changes will be affecting the client directly in the pocketbook. For many clients if not all clients there will be a price increase for their audits compared to previous years. This may be due to the current economic conditions in Canada as well as the AASB's decision to adopt international standards. Many of the standards cause an increase in the audit work to be done and therefore will cause for a lengthier audit, which in turn will cause for an increase in the price of an audit. The clients can educate themselves by reading articles posted in magazines or even approaching their accountant with questions they may have regarding the transition.

In conclusion, many different parts of the accounting profession will be affected by these changes. So why would the AASB adopt these changes? Moreover, how did the AASB choose this alternative? The AASB had the option of choosing from three alternatives, which were as follows: to continue with the existing Canadian standards, transfer to the US standards or transfer to the International standards. There were many disadvantages of maintaining the Canadian standards. Continuing with these current standards was regarded as being costly and inefficient due to the reports that had to be duplicated. The alternative of adopting US standards had been present for many years but was geared in a different direction after the Enron restructurings that took place in the US (Buckstein, 2009). It was noted that there is a difference in power between the Canadian Public Accountability Board (CPAB) and the Public Company Accounting Oversight Board (PCAOB) and this would have caused problems if these standards were adopted (Buckstein, 2009). As well, the US standard setting was more of a rules-based as opposed to Canada's principle-based (Buckstein, 2009). They have decided to adopt ISAs for Canada for many reasons. The first being that many countries all over the world have accepted ISAs or have decided upon accepting ISAs in the near future (Stevens, 2009). The second reason being that the Canadian approach used for standard setting is quite similar with the International Auditing and Assurance Standards Board's (IAASB) approach (Stevens, 2009). The third reason is that the thorough and clear procedure used to develop and issue standards is accommodating to the CAASB's input (Stevens, 2009). Another reason refers to the accommodating IAASB's guidelines to make necessary adjustments to adhere to the national regulatory requirements (Stevens, 2009). The final reason for the adoption of these changes is that a "Clarity Format" was created by the IAASB to allow for an easier transition for the auditors (Stevens, 2009). The "Clarity Format" is broken down into five separate parts including an introduction, objectives, definition, requirements, and an application and other explanatory material section. The introduction describes the CAS's purpose and scope, the objectives are where requirements are described, the definition describes what a CAS means, requirements explain the terms that must be met by the auditor and the application/other explanatory material section provides more guidance on the requirements for CASs (Stevens, 2009). Each of these parts will provide the auditor with clear and consistent information to understand each of the new CASs more easily. This is to assist in making the transition go as smooth as possible in respect to the public accounting profession. In regards to the transition of CSQC 1, this is approximately a week away and will need the attention from the public accounting profession. Nevertheless, in regards to the adoption of ISAs, this is approximately one year away so therefore, the accounting firms should start preparing, planning and training their employees as soon as possible if they have not done so.