Audit report changes and the impact on law firms

Changes to the International Standards of Auditing (‘ISA’s) are leading to lengthier and more detailed audit reports covering the period on or after 15 December 2019. What does this mean for your law firm?

Financial reporting changes

Much of the focus of financial reporting in recent years has been on improving the ‘front end’ of company and firm financial statements. This means an enhanced focus on appropriate KPI’s, as well as the introduction of SECR (Streamlined Energy and Carbon Reporting) for large firms to address environmental concerns. Assessing how firms have addressed and reacted to the challenges of coronavirus were key features of audits conducted in 2020, and this will certainly remain the case for 2021 audits under the new requirements of auditing standard ISA 570.

Audit report changes

The audit report itself has now evolved, as specific comments are required, relating to planned procedures around business-critical laws and regulations, as well as enhanced commentary around audit procedures, which are designed to address the areas of the financial statements most susceptible to material misstatement due to fraud.

What does this mean for the legal sector?

Clearly the auditor will need to ensure a tailored approach for each law firm, considering issues around structuring, the specific nature of practice groups, the approach to unbilled time, and volumes of client money, amongst other things. We would certainly expect the audit report to acknowledge the requirement for compliance with the laws governing the provision of legal services and the SRA Code of Conduct.

The inherently judgmental nature of valuing accrued income / work in progress portfolios also lends itself to a heightened risk of potential manipulation and therefore fraud, so we would also expect to see acknowledgement of this, together with reporting of the audit procedures undertaken.

Firms may have borrowed additional funds from lenders to ensure sufficient liquidity to trade through the pandemic, so any covenants related to that funding may also be an area of further focus for the future.

Provisioning for PI matters can also be complex, and we would not be surprised to see further coverage of this as part of this enhanced reporting.

If you would like to discuss any aspect of the above, please get in touch with Rowan Williams of Hywel Pegler