Auditor Liability Limitation Agreements

Non-audit services

Although the company’s external auditor has disclosed some of the non-audit services in the annual report, their objectivity and independence are safeguarded by restrictions on the provision of such services. For example, there are several types of non-audit services that the external auditor of the company can adopt for better provision of services only with the prior approval of the RAC. However, there can be various kinds of services that does not necessitate the approval of RAC. In relation to this, the services consist of various kind of activities that can be supervised or monitored by the company’s management. Furthermore, advocacy role on behalf of the company can also be played by the external auditor in relation to non-audit services (BHP Billiton, 2017). Lastly, even the RAC has framed a policy wherein its entire group of policies and pre-approval procedures are prevalent and that can play a role in maintaining the independence of external auditors.

Remuneration of auditors

From the above table, it is evident that the major proportion of the auditor remuneration derives from review of the financial report. Other segments include subsidiaries auditing, assurance affairs, etc (Refer Appendix)

Significant nature of the non-audit services of BHP

It can be observed from the annual report of BHP that there were no non-audit services that have been covered by it and was included in the policy of ‘Provision of audit and other services.’

Key audit matters

In relation to any company, it is notable that key audit matters must be reflected to enhance the quality of corporate reporting. Such matters are of prime importance and therefore, must form part of a company’s annual report. Moreover, these matters cannot be disclosed by the management because the judgement of auditors is mandatory in assessing the same. Besides, disclosure of the same matters as key audit matter can allow users in understanding the aspects that has made the auditor portray an unqualified opinion on the financials of the company (Parker, Guthrie & Linacre, 2011). Moreover, the reason why auditors have chosen various matters as key audit matters can be attributed to the fact that these can be exposed to various types of fraud or errors and therefore, evaluation of the same is necessary.

When it comes to BHP, they have not changed their disclosure of key audit matters in 2017 because it was the same in previous year. The first key audit matter in relation to the company is the assessment of future cash flows wherein judgement is compulsory for every cash-generating units that can be used to assess the recoverable amount of Property, Plant, and Equipment. This also includes the intangibles’ recoverable value in the company’s financials. In addition, the recoverable value of investments is also included in the subsidiaries of the company (BHP Billiton, 2017). The next key audit matter is the cash flows of future in association with the forward-looking estimates and this also requires judgement of auditors as the same cannot be determined accurately. BHP has also selected assets valuation as a major matter due to sizes of balances that require judgement in evaluating the efficacy of inputs used in analysing their recoverable value. Moreover, pursuing different affairs in different companies also attract different types of taxes like corporation tax, royalties, etc that are associated with international transfer pricing (BHP Billiton, 2017). Therefore, such taxes are also considered as the key audit matters of the company owing to its tax rules that necessitates judgement on the company’s part to analyse various contingent liabilities, associated provisions, and expectation of tax resources. Another key audit matter is the rehabilitation and closure policy wherein significant estimates over the mine and reserves’ life in evaluating the provision of rehabilitation that requires judgement because of issues in expecting the quantum and time of future costs (Cappelleto, 2010). After this step, determination of an efficient rate to discount such costs back to the present value is facilitated and hence, requires judgement on the auditors’ part. Therefore, these matters are BHP’s key audit matters.

Audit Committee & Charter

The company has an audit, risk management and compliance committee. Further, the charter assists in framing the duties delegated by the management to the committee and its objectives. The role of committee is to provide support to the management in association with the company’s governance framework. This includes internal control and risk management systems, accounting processes, both external and internal audit measures, etc.

The committee is primarily bound to perform various affairs within the boundaries of its roles set in the charter and thereafter, provide significant recommendations to the management. Further, the audit and risk committee also have unrestricted accessibility to the senior management of the company and its financial records as and when required (Mock et. al, 2013). It is liable to set meetings with both the external and internal auditors without any prime member of the board being prevalent, as and when the committee find it appropriate (BHP Billiton, 2017). Nevertheless, the committee has been authorised to attain various professional suggestions and independent counsels that it can regard as crucial to execute or implement its operations.

Differences in the responsibilities of management and directors from that of the auditors’

The fundamental to a company’s financial statement or report is the segregation betwixt the responsibilities of an auditor and the directors or management. In relation to this, it is notable that the management and directors of the company are responsible for the preparation of financial report and the contents of such report are the assertions offered by them. In contrast to this, the auditor is primarily responsible for the examination of such financial report prepared by the directors and management to facilitate in the expression of an opinion on the truthfulness and fairness (Cappelleto, 2010). Furthermore, the management’s duty for the truthfulness and fairness of presentation in the report carries with it the privilege of ascertaining which disclosures are mandatory. Even though the directors and management have the responsibility in preparing financial report, yet the auditors can also assist in such preparation. For instance, he can advise or counsel them as to the implementation or adoption of a fresh accounting principle and during audit processes, he may also propose significant adjustments to the financial report (Livne, 2015). However, acceptance of the auditors’ advice and the incorporation of such suggested adjustments in the financial report does not alter the general separation of responsibility. Finally, the management is only liable for all the decisions related to the content and form of the financial report (Arens et. al, 2013). Further, if the auditor finds that the disclosure on the part of management and directors are not acceptable, he may issue a qualified or adverse opinion or may also withdraw from himself from the engagement. Overall, the responsibility of the auditors is restricted to the performance of audit investigation and thereafter, reporting the outcomes based on the GAAP (generally accepted auditing standards). In most of the cases, any significant omissions and errors can be discovered if the audit has been performed in this way (Niemi & Sundgren, 2012).

Material subsequent events

BHP has encountered few material subsequent events after its date of reporting and this can have a material impact on the financials in the upcoming tenure. Further, this can also result in a material impact on the company’s financial performance if it was reported in the current year. The first material subsequent event that incurred after the reporting date of BHP was that it announced a scheme of investment amounting to $US2.5 billion so that its Spencer Growth Option can be developed. Besides, this consisted of establishment of copper constructors that can facilitate in wide spreading the life of mine by 50 years. Subsequently, the company had also announced regarding the increment of global average capitalization up to $US 2.9 billion (BHP Billiton, 2017). The next material subsequent event of the company was that it evaluated its onshore US assets to be non-core in nature and thereafter, it also paved a path for options that can enable in quitting these assets. This was done by the directors and management of the company collectively. Nevertheless, such subsequent event was a major part of the ongoing portfolio review. However, the company had also provided that implementation of such options can take some extra time. Hence, these were the material subsequent events that occurred after the company’s reporting period and since these were disclosed in the annual report, it signifies that these transactions of events could easily result in a material impact on the financial performance.

Efficiency of the material information disclosed by auditors

From the annual report of BHP, it cannot be observed that the material information disclosed by auditors were not equipped with loopholes. Furthermore, the information was not equipped with proper transparency that sheds light on the ineffectiveness of material information. The primary reason behind such gaps can be due to the prime attention exerted only on few matters and discarded the others that is not effective in nature. Moreover, the key points chosen for disclosure was not portrayed well in the financial report and this clearly highlights that the material information cannot even assist in proper decision-making on the part of users (BHP Billiton, 2017). However, the auditors attempted in describing the reasons behind the adoption of prime matters and explained the same to enable users in understanding the same. This was a positive aspect on the part of auditors. In relation to this, when investments are undertaken by any company, they must record enhanced and thorough details about the liabilities and assets to gain better understanding related to the transaction. In contrast to this, the auditors failed to offer a thorough understanding regarding the same and that can pave a path of obstacle for the investors to make proper decisions. Therefore, discarding various prime matters for disclosure and offering notes or footnotes cannot assist in proper decision-making (Roach, 2010). Besides, this may mislead the users in their path and cause hindrances in the future. Hence, it is the duty of auditors to present the reports in a way that can assist every user in decision-making and every matter of significant importance must be thoroughly disclosed.

Whether material information is missing or remains under-reported

From the company’s annual report, it can be noted that it has disclosed material information through footnotes and notes to financial statements but where the same was necessary, it has failed to disclose the same. For instance, the company has not disclosed proper footnotes in the financial statements segment that is not a positive indicator. In relation to this, it must be taken into consideration that footnotes can play a key role in effective decision-making but since the same is not prevalent in the financial statements, users may find it problematic to extract usefulness from the financial statements like balance sheet, profit and loss account, etc. In addition to this fact, the section of notes to financial statements has not been entirely disclosed by the company that can create further complications for the users in their decision-making processes. For instance, since the company has disclosed information regarding both the statement of comprehensive income and statement of income, they are bound to disclose non-material information separately and not in the financial statements (Wood, 2011). Nevertheless, such financials must only accommodate material information that can assist in enhancing the qualitative characteristics of conceptual framework like relevance, materiality, reliability, etc.

Hence, disclosure of proper information on the part of the company is missing and if such disclosure measures are not corrected in future, users may face complications in their decision-making and the company’s reputation may be spoiled on a whole.

Conclusion

It can be seen from the annual report that the auditors have been effective in their disclosure mechanisms and have not deviated themselves from ethical standards. This can be proved by their disclosure of key audit matters and other relevant issues through the auditor’s report. Moreover, even the directors and management have assured fulfilment of necessary rules and regulations that has been catered to in an effective manner. The company has also disclosed material information regarding the non-audit services that have been provided by the same auditors who have undertaken the auditing services. This highlights the fact that internal control mechanisms are in place that can safeguard the company from future risks. Besides, there are some issues in the material information in the financials that is a slight complication but must be addressed as soon as possible.

Follow up questions

There are questions that can be asked to the auditor at the general meeting of the company:

References

Arens, A. A, Best, P. J, Shailer, G. E. P & Loebbecke, J. K. (2013) Assurance Services and Ethics in Australia, 9th ed, Australia: Pearson.

BHP Billiton. (2017) BHP 2017 Annual report and accounts. https://www.bhp.com/media-and-insights/reports-and-presentations [Accessed 14 September 2018]

Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia, AFAANZ,

Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons. [online]. 30(1), p.143-156. DOI: https://doi.org/10.2308/acch-51309

Livne, G. (2015) Threats to Auditor Independence and Possible Remedies [online]. Available from: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full [Accessed 7 September 2018]

Mock, T. J., Bedard, J., Coram, P., Davis, S., Espahbodi, R. and Warne, R. (2013) The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice and Theory. [online]. 32, pp. 323-351. DOI: https://doi.org/10.2308/ajpt-50294

Niemi, L. and Sundgren, S. (2012) Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs. European Accounting Review. [online]. 21(4), p. 767-796. Available from: https://doi.org/10.1080/09638180.2012.671465 [Accessed 14 September 2018]

Parker, L., Guthrie, J. and Linacre, S. (2011) The relationship between academic accounting research and professional practice. Accounting, Auditing & Accountability Journal. [online]. 24(1), pp. 5-14. Available from: https://media.accountingeducation.com/1304/Parkeraaaj24(1).pdf [Accessed 14 September 2018]

Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.

Wood, D A. (2011) The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor's Reliance Decision. The Accounting Review. [online] 86(6), 2131-2154. DOI: https://doi.org/10.2308/accr-10136