By Hayes Knight – 13 November 2011

To borrow some words of Bob Dylan: “…the times they are a-changin”. We look at recent changes as they are impacting auditing and assurance of not-for-profit entities in New Zealand.

Audits continue to be the most popular form of independent assurance requested over financial statements; however, recent years have seen some very significant changes in auditing both internationally and in New Zealand. This is, and will continue to, impact audits of not-for-profit entities. Accordingly it is important that all those involved, such as the entity governing bodys’, their donors, and other key stakeholders understand the changes and the implications.

What’s changed? – Standards

New Zealand has adopted a new suite of audit standards, completely replacing the old, which will be applied to all audits of financial statements.  These are mandatory standards that all qualified accountants are ethically bound to follow when performing an audit in New Zealand. Failure to do so potentially exposes the auditor to disciplinary action and ultimately could see them lose their license to practice.

These new standards are called International Standards on Auditing (New Zealand), which is a bit of a mouthful, so already they are more commonly being referred to as ISA (NZ)s. As the name indicates, these are international standards albeit subject to a New Zealand review and approval process. In a very few cases they have had minor modifications to suit the New Zealand environment. The end result is that we now have a truly international set of auditing standards in place in New Zealand. This change was needed to maintain the credibility of New Zealand’s auditing internationally. It also means that New Zealand is now keeping up with the best of any international developments in audit standards. These include many steps to strengthen standards in the wake of various financial disasters around the world.

Important to note is the fact that the audit standards are entity neutral, meaning that there is only one set of audit standards. These apply to all audits of financial statements regardless of entity type, size, or complexity.  There is no ‘audit-lite’ version. If you want an audit under New Zealand standards the full suite are applicable.

The good news is that the essential nature of auditing and approach to an audit of financial statements has remained fundamentally unchanged under the new standards. However, the ISA (NZ)s are much longer and more detailed. As a quantum there are now 36 standards with a total of 700 pages, compared to 28 previous standards with a total of 250 pages. More significantly though, the new standards are far more prescriptive in the steps that auditors must undertake in all audits. As a comparison they include a total of 519 mandatory steps as opposed to only 221 under the old standards.

Many entities being audited will only see some of these changes as much of the new mandatory impositions on auditors concern the levels of documentation they are required to maintain. However, most entities should notice an increased level of communication from their auditors about the audit, the process and the findings.

What’s changing? – Regulation

The financial collapses over the past few years coupled with an increase in oversight bodies internationally, has really put the spotlight on auditors.  The subsequent financial losses have also increased the liability risk and general exposure for auditors.

In the past regulation has been carried out by the New Zealand Institute of Chartered Accountants. This body has done a good job and their reviews of auditors have become increasingly rigorous over the last few years. So much so that this has motivated many occasional and smaller auditors to turn their back on the discipline as it is simply too risky or the process too involved for them to continue.

The current system of self-regulation has been changed. In it’s place is a new statutory accounting and audit standard setting body established from 1 July 2011. It’s called the External Reporting Board (XRB) and it is designed to provide greater independence to the standard setting process.  More information about this board and its two standard setting sub-boards can be found at I highly recommend visiting this website and registering for their email updates as it they will help keep you in the information loop re ongoing changes and developments.

In addition to a new standard setter, the newly formed Financial Markets Authority (FMA – see ) represents a shakeup of the financial regulatory function in New Zealand. It has taken over the functions of a number of former regulators such as the Securities Commission, parts of the Companies Office etc.

The FMA is established to enforce securities, financial reporting and company law as they apply to financial services and securities markets.  They also regulate securities exchanges, financial advisers and brokers, trustees and issuers – including issuers of KiwiSaver and superannuation schemes. Shortly they will also regulate the auditors of any issuers in New Zealand. Hence from 1 July 2012 any auditors who wish to audit an issuer will be required to apply to be licensed and their firm registered with the FMA.

All in all, these changes are prompting many in the auditing and assurance profession to re-think their on-going involvement in providing audit services, as for many the risk-reward equation is no longer stacking up. While no-one can deny the benefits of having specialist and very well regulated auditors, sadly a likely casualty of the changes is the not-for-profit sector, which has in the past relied upon the largess of accountants who ‘did some auditing’.  In future we are possibly likely to see less accountants willing to audit.

Also, those that remain are far more likely to be specialist auditors and as such unlikely to offer their services at discounted or pro-bono rates as the costs to them, such as insurance and risks, will be too much.

Perhaps the issue is not the availability of auditors, but rather whether audit is the most appropriate form of independent assurance over financial statements.  An issue that deserves further consideration…