How to make the audit process easier for your ESEF reports - CoreFiling website (2024)

The European Single Electronic Format (ESEF) has changed how issuers experience the final stage of the audit. However, this changed experience is not the same for all.

Issuers around Europe have examined the ESEF software and services markets and have made their choices. The overwhelming majority have chosen to:

1. Outsource the conversion of the Annual Financial Report (AFR) to ESEF
2. Go with a solution which involves a bolt-on tool. This helps convert reports prepared in PDF or MS Word to the ESEF format

The reasons for these choices are simple. Most issuers view ESEF as something complicated that they do not want to be doing on their own. Bolt-on solutions offer better value than their more expensive disclosure management cousins and have the added advantage of being able to maintain existing processes around financial reporting.

However, not all bolt-on solutions are the same. A lot of financial reporting teams of listed companies have not had a great experience going through the audit of ESEF since it was implemented; especially the last 48 hours.

The challenges

Number of iterations

The process of auditing the compliance with ESEF involves multiple iterations of the ESEF package shared with the auditors. The number of iterations has anecdotally come down in the second year of text block tagging but the transition between versions remains a challenge for both preparers and auditors. For the preparer, the digital mark-up must be transferred to the latest version and the auditor must check that this has happened accurately, whilst checking if any audit findings from the previous draft have been addressed.

It is not just the electronic marking-up of the AFR which is changing between different versions – it is also the underlying AFR. Bolt-on tools need to have the capability to roll forward the digital mark-up from the previous ESEF package version to the new updated input documents accurately. A changing AFR makes that harder.

With each new turn of the document, the preparer attempts to address the latest auditor findings in respect to the digital mark-up. What is expected by the preparer here, is that mark-up that was previously cleared by the auditor, remains unaffected when rolled forward by the tagging tool.

It is important to be able to rely on the software and the service provider, and to be comfortable that addressing the latest set of auditor findings will get you closer to the final report with every turn of the document. This is absolutely crucial in the very final report. Preparers do not want any surprises when they are expecting to get that final sign-off from the auditor. If you have addressed the last few outstanding audit findings, then surely you should end up with the AFR that the company directors and auditors are happy to sign.

Tables

Various bolt-on solutions have struggled with converting tables in the AFR to HTML format. Even when tables are well presented in the HTML, extraction of the disclosure from the digital mark-up results in undecipherable content which does not satisfy the ESEF Reporting Manual requirements. Inevitably this gets flagged by the auditor. The ESEF Reporting Manual expects the information to be ‘legible and clear’ and ‘meaningfully transcribed’. At the very least it expects space between words and numbers in the source document to be retained. The lack of table structures in the PDF format means that a lot of bolt-on tools cannot meet these expectations.

The last 48 hours

As anyone involved in the audit of Annual Financial Reports of large companies knows, the AFR quite often keeps changing until the day of signing. Plans to go ‘pens down’ a couple of days before this date rarely materialise.

What do the auditors need?

The auditors, of course, need to audit the entire AFR including its compliance with the ESEF regulation. Crucially, they need to report on the final version of the report. Quite often, the core audit team has been working on a draft PDF AFR, whilst their ESEF specialist colleagues have been working on a separate draft ESEF package. Therefore, as part of the audit, the audit team will check that the PDF that they have been doing most of the audit procedures on, is the same as the report within the ESEF package. Afterall, it is the ESEF package that dispenses the company’s reporting obligations under transparency regulations. That can be a time-consuming process, especially if both the human readable AFR and the underlying tagging have changes compared to the previous version.

Tips to make the audit process smoother

• Share a first draft of the ESEF report with your auditor sooner rather than later. This can even be done on a ‘skeleton’ AFR template, prior to the year end.
• Document any judgements you are making during the tagging process and share these with your auditor. This will reduce the need for back-and-forth email conversations with your auditor. It will also strengthen your controls and document your policies around digital reporting.
• Do not leave square bracket placeholders unactioned until the end. Making a minor change in the notes right at the end could result to multiple text block tags being reported as having changed in the auditor’s tool. Each will have to revisited by the auditor.
• Choose a preparation solution which will help you produce high quality output and that will provide you with the right level of support during preparation and during the audit process.

How CoreFiling helps to make the audit process easier

Solution options

• • Our various partners offer CoreFiling powered solutions that satisfy customers choosing bolt-on solutions, but also customers preferring a disclosure management solution.

Roll forward / handling document updates

• • Our Seahorse tagging tool provides accurate rolling forward, both from version to version but also from year to year for reports prepared in range of formats including PDF, MS Word, MS Excel, ePub (e.g. InDesign export) and XHTML.

• • For filers choosing to prepare their report in simpler MS Word format, Seahorse allows the preparer to export the tagged document back into Word for amendments to be made while retaining all previous tagging.

Audit trail / documentation

• • Seahorse maintains a full audit trail of every changed made, documenting the use and the time when the change made.

• • Seahorse allows the user to add comments to tags applied. Users can therefore document any judgements made during tagging. These can then be exported to Excel to be kept as a record and audit trail, or to be shared with the auditor.

Tables

• • Seahorse offers an easy and quick way to detect tables and bring them into the desired format, even when the source document is PDF.

Support and expertise

• • CoreFiling’s expert support team can assist to work through the more challenging points raised by the auditors quickly and efficiently.
  • CoreFiling is an advisor and technology supplier to government regulators and data collectors, auditors and service providers. CoreFiling is also an active contributor to digital financial reporting standards

What is next?

Most ESEF filers will see their digital reporting requirements extend to include digital mark-up of their Corporate Sustainability Reporting Directive (CSRD) disclosures. This will also fall within the scope of audit. There is a window of opportunity to fine tune the preparation and audit process while the ESEF requirements are stable; before the next step-up to the regulation.