CEAOB Guidelines: Helping Frame the ESEF Conversation
In early 2020, companies will need to complete their assessment of the impact the European Single Electronic Format (ESEF) will have on their audit and reporting process in order to undertake all the necessary steps to ensure compliance with the new requirements.
In November 2019, the Committee of European Auditing Oversight Bodies (CEAOB) released guidelines they felt auditors, standard setters and national oversight bodies would benefit from. The guidelines put into context the related provisions of the ESMA mandate and give a framework of how the ESEF audit should be carried out.
In this blog, we look at how companies can use the CEAOB guidelines to help assess the impact of the ESEF on their current process.
Purpose of the CEAOB public statement
The CEAOB guidelines highlight the analysis carried out by the European Commission services on the ESEF in which it states that statutory auditors of companies with securities listed on EU regulated markets will have to provide an audit opinion stating:
- Whether the financial statements included in the annual financial reports give a true and fair view in accordance with the relevant financial reporting framework
- Whether these financial statements comply with the requirements set out in the ESEF regulation
With this analysis serving as the background, the CEAOB developed these guidelines regarding how the audit of ESEF should be carried out in order to facilitate consistent implementation.
It’s important to note that any guidance from the CEAOB is subject to national transposition since the audit requirements are set at the national level. For example, the legislation for Germany is already in draft.
Reminder of what’s in scope
Time frame: Financial reports to be published by issuers for financial years beginning on or after 1 Jan 2020 are to be presented in the new electronic format.
Content: The ESEF report is to include, in particular, the financial statements, the management report and the responsibility statements of the persons responsible within the company. ESMA is of the opinion that it makes sense that all of this information is in one report. However, this will also depend on local law and regulations for other reports. This is one common area of confusion, which we address in this blog.
Format: The entire report needs to be presented in XHTML and those companies preparing consolidated IFRS financial statements will have to XBRL® tag those statements in accordance with the ESEF taxonomy and Inline XBRL® technology.
Highlights of the CEAOB guidelines
When to tag
The timing regarding the tagging of the financial statements by the company will impact when the auditor can perform the audit, and eventually, which approach will be taken. The CEAOB guidelines outline two scenarios:
Scenario 1: The financial statements in the ESEF are available at an early stage for the auditor
What this means — In this scenario, it will be advantageous to work with a platform that allows you to view the iXRBL® without having to leave the platform or convert the content. Issuers can save the iXBRL and send it to the auditor, or the auditor can be allowed access early on in the process with authorisation to specific areas of the report when they are ready.
Full blackline capability is important as it allows the user and auditor the ability to quickly review any updates or changes. Plus, this allows the finance team to engage with the auditor early to address issues in advance of the final audit.
Scenario 2: The “bridging” option
In this scenario, content is prepared in various editing applications and then bolt-on tools will convert content or require content to be uploaded into another tool to tag and generate the iXBRL. Even if mapping of the XBRL has been done in advance, the auditor will need to perform a reconciliation or bridging.
What this means — If the content is presented late for tagging, the finance team will have to review late in the process before passing it to the auditor. While this may allow the content to be drafted in the current editing tool, it will negatively impact the availability of the ESEF report and the audit opinion to the board.
How to tag
The CEAOB guidelines state that the auditor should obtain reasonable assurance about whether the financial statements, including relevant disclosures, have been marked up (with XBRL tags), where relevant, in all aspects with the ESEF requirements.
The CEAOB guidelines remind readers that obtaining this assurance will involve assessment of appropriate materiality and consideration of qualitative and quantitative aspects.
What this means — Since ESMA states that the choice of concept is an accountancy decision, using AI or auto-tag technology may be a false saving. Consider working with a solution provider who will support you with services and education around tagging, and be sure the final selection of the tags is something your company feels comfortable with.
Risk of material misstatement
The CEAOB guidelines note that the auditor should evaluate whether the tagged information is free from material misstatements. The guidelines identify areas where risks attached to the marked-up information may lie:
- Completeness — The platform you are using will help validate whether everything has been tagged, but there are also easy visual checks you can carry out as you review and update the content. Extensions can only be created once a core element has been selected.
- Accuracy — Immediate access to the XBRL in the document view allows concurrent review of human-readable and machine-readable content such as credit/debit, scaling (e.g., millions or thousands).
What this means — This makes it very important to make sure you can easily track figures back to source data in general ledgers and that the iXBRL can be viewed in the document or the iXBRL viewer. Ideally, the solution tables of your platform should include formulas and blacklining which will make checking much faster.
The process should be as efficient as possible so the XBRL review can be concurrent with the existing audit checks without overloading the finance team and jeopardising key delivery dates.
Procedures to respond to risks identified
The CEAOB guidelines note that enough time should be given to the finance team to deliver the appropriate responses to the risks of misstatement. The auditor may decide to rely on, to an extent, relevant controls put in place by the issuer.
What this means — With this in mind, the platform chosen to produce the annual report should be focused on the requirements of the team tasked to deliver the audit of the XBRL and include the ability to easily create a certification process that can be evidenced to the auditor.
Whether tags are compliant
According to the CEAOB guidelines, companies are likely to be required to gain a positive conclusion or opinion from the auditor on the compliance of the XBRL tags.
What this means — This would give the board the comfort of a qualified opinion before signing the reports.
The CEAOB guidance is a useful framework to assess the impact the ESEF may have on the current annual reporting process. However, the guidance does not address how companies can continue to maintain the design and visual impact of their printed reports.
Since the ESEF mandates the publication of the report in XHTML, companies have already begun to invest in well-designed and dynamic websites to help deliver their message to key stakeholders. This presents a fantastic opportunity for platform providers to create a bridge with the designer so the designed compliance content, which traditionally was available as a PDF, can be delivered as dynamic content on the website and a PDF for the printed report. Keep an eye on the Workiva blog as we will explore this opportunity in more detail soon.
Ultimately, the ESMA mandate brings with it the opportunity to invest to make process improvements. Therefore, it is important that the conversation about ESEF bring those responsible for design and those from the finance team together in the same room.
Has your organisation started its assessment on the impact of the ESEF? Reach out to us for a demo and see how Workiva can help.
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About the Author
Hamish has helped clients improve their financial reporting process for over 20 years. This has involved helping clients implement collaborative workflows, SEC compliance with HTML for their annual reports and Form 20-Fs, iXBRL for HMRC and now iXBRL for the ESEF mandate. While these changes are often driven by external events, helping clients successfully implementing change within organisations is often the greatest challenge.