Benefits of Interim Reviews

In the aftermath of the Enron fiasco, the Securities Exchange Commission (SEC) in the United States introduced a mandatory requirement for its registrants (except for those that qualify as foreign private issuers) to have quarterly reviews of interim F/S by their independent public accountants. A decade later, the Auditing and Assurance Standards Board (AASB) in Canada is considering whether interim F/S should be subject to mandatory reviews. The advantages and pitfalls associated with such a change can each be considered from the perspectives of the client and auditor.
Benefits: One of the key benefits to both auditors and clients of interim review engagements is the earlier identification and resolution of issues that affect financial reporting quality, thereby potentially increasing the reliability and relevance of quarterly F/S and the financial reporting process of companies that are not currently reviewed. Research indicates that reviews appear to reduce the deferral of adjustments to the fourth quarter, translating into potentially fewer restatements of interim and annual F/S. For auditors, mandatory interim reviews would shift certain work from year-end to earlier periods, thereby distributing audit effort. It would also save them time because problems that would not otherwise have been detected until the year-end audit would be fixed when discovered during the interim review engagements. In addition, auditors believe that mandatory reviews will act as an incentive for Canadian companies to strengthen their internal controls, which will have flow-through benefits to the auditor in the form of reduced substantive testing during the annual audit, a more expensive audit procedure. It also gives auditors the opportunity to charge higher fees, thereby serving as an additional revenue stream.
Research indicates that there is a strong correlation between quarterly stock returns and interim earnings for Canadian companies that have reviews of their interim