New CESR-Fin Head Calls for Accountants Discussion and Analysis

In a wide-ranging and thought-provoking address on the role of outside auditors, Paul Koster, the chair of CESR-Fin, advocated a new section in the annual report entitled the accountant discussion and analysis (AD&A), to be modeled on the MD&A. In recent remarks, Mr. Koster, who is also a Member of the Netherlands Financial Markets Authority, also advocated a total disconnect between audit and non-audit services performed by the independent audit firm. Member Koster recently replaced John Tiner as chair of the Committee of European Securities Regulators-Financial.

This is a very interesting concept, and, come to think of it, if we have an MD&A and now a CD&A, why not an AD&A so that the independent auditor can tell its story in a plain English narrative. In the new AD&A discussion, as envisioned by Mr. Koster, the accounting firm would be required to describe, in its own words, the company’s financial environment, explaining the key ratios, the financial performance, how margins could be improved and what additional auditing the firm has performed in that regard. The AD&A would also include the audit firm’s own explanatory notes on the governance environment and its experience of it, particularly the workings of the audit committee, and the matters requiring attention in the coming years such as the tax position, as well as an assessment of the risk management system and its evolution.

Member Koster also envisions the AD&A providing a better understanding of the workings of the audit committee and explanatory notes on the additional tasks that the auditor has carried out in light of findings and financial developments with regard to competitors, as well as explanatory notes on accounting policies and the choices made in that regard. In his view, the outside accountant is in a better position than anyone else to communicate in this way; and the disclosure will also create value added for the financial market.