11 Apr

FRC to enhance monitoring of audit firms

The FRC has announced plans to enhance its monitoring of the six largest audit firms to avoid systematic deficiencies within firms’ networks, disruption in the provision of statutory audit services and instability in the financial sector.

The plan announcement comes after warnings issued and collapse of major infrastructure companies in the UK.

The FRC will set out its expectations of each audit firm and use evidence it gains to inform its supervision programme for these firms.

The introduction of such “supervisory” role undoubtedly will place more pressure on the FRC. Furthermore, the consequences, if any, the FRC reputation may face shall a client of the top six audit firms were to fail again under its watch.

The FRC will focus its attention on five key pillars that are critical to the stability of the audit firms and quality of audit work. These are:

  • Leadership and governance;
  • Values and behaviours;
  • Business models and financial soundness;
  • Risk management and control; and
  • Evidence on audit quality, including from the FRC’s annual programme of audit quality reviews.

The FRC has begun work on monitoring risk reporting, contingency planning and IT security at audit firms and will report to the firms on its findings on all the five pillars. The results of the FRC’s inspection of audit quality by the firms will be published in firm-specific reports in June and summarised in the annual Developments in Audit report in July.

Melanie McLaren, Executive Director of Audit and Actuarial Regulation at the FRC, said,

As the UK’s competent authority for audit, the FRC is responsible for the regular monitoring and mitigation of risks in the audit market. The work of the Big Six audit firms is core to the integrity and transparency of UK capital markets and so it is vital that the FRC introduces a new approach to monitoring their stability and performance by focussing on aspects of their businesses that are critical to the provision of high quality audit. We will discuss with firms how well candidates for key leadership and governance roles such as Independent Non-Executives, Heads of Audit and Ethics Partners meet our expectations in terms of experience, skills and attributes. Where we do not have specific powers in this regard we will look for the firms’ cooperation
29 Jan

It’s just too little, too late: Carillion plc

The FRC will conduct the investigation as quickly and thoroughly as possible. However, most stakeholders have raised concerns to whether the warnings of such a prominent player in in infrastructure development should have been under the magnifying glass of the FRC before it all collapsed.

The FRC has now decided, following enquiries made since a profit warning in July 2017, to open an investigation under the Audit Enforcement Procedure in relation to KPMG’s audit of the financial statements of Carillion plc. The investigation will cover the years ended 31 December 2014, 2015 and 2016, and additional audit work carried out during 2017.

Many have criticised the auditor KPMG which failed to detect and make the wider stakeholder aware of the issues which led to the collapse of its client. It is reported in the accounts of Carillion that KMPG earned fees reaching almost £30m. It is one of the primary duties of an auditor to detect and report on any matters which may lead to the client not being able to carry out “business as usual” for the foreseeable future. The reporting of going concern is enshrined in the rules in which the auditor then must sign off its clients with a clean bill-of-health.

FRC will consider whether the auditor has breached any relevant requirements, in particular the ethical and technical standards for auditors. Several areas of KPMG’s work will be examined including the audit of the company’s use and disclosure of the going concern basis of accounting, estimates and recognition of revenue on significant contracts, and accounting for pensions.

The FRC is progressing with urgent enquiries into the conduct of professional accountants within Carillion in connection with the preparation of the financial statements and other financial reporting obligations under the Accountancy Scheme.

The FRC is liaising closely with the Official Receiver, the Financial Conduct Authority, the Insolvency Service and The Pensions Regulator to ensure that there is a joined-up approach to the investigation of all matters arising from the collapse of Carillion.

22 Aug

Disintermediation, and the role of humans in providing assurance

Innovation, both in technology and business model, has given both enterprises and individuals the ability to perform many tasks that previously required a third-party expert.  Shopping for insurance,  sending money overseas and most recently, raising venture capital.  It is worth asking whether this can happen to the auditing profession, or to the function of assurance in general.

In one sense, the answer has to be no. Machine learning may evolve to the point where it is better at spotting compliance gaps than human auditors, but cannot make the final judgement and opinion required of an auditor.  But there is still a huge change coming. Humans may continue to have a key role in providing assurance, but the tasks a human needs to perform in fulfilment of that role are likely to undergo their most significant change since the invention of double entry accounting in the mid 1300’s.

Fundamental change in the assurance process

We tend to think of assurance as a deterministic process.  When performing an audit, you follow a well-defined process, and at the end of the process you make a yes-or-no decision about whether a company’s books are a good representation of the company’s true financial position.  Standards and compliance checks follow a similar pattern.  The advent of cloud computing, blockchain, and peer-to-peer business models make this harder: they are not only blurring the lines of data ownership, but much more fundamental concepts, such as what defines an employee or who owns a company.

There is an upside. However, data may be becoming much more disperse, but it is also becoming more granular, and there is a lot more of it.  While it becomes much harder to provide assurance via a deterministic process, it also becomes much easier to provide assurance via a stochastic process. In other words, it is harder to provide a categorical statement of compliance, but easier to quantify a level of confidence that compliance has been met.

This change poses both threat and opportunity.  The threat is that a good portion of the tasks that auditors perform today will become automated.  The opportunity is that there is a huge unmet demand for guidance and thought leadership that accountants are uniquely well qualified to provide.

Huge unmet demand for leadership

For all the benefit they provide, disruptive forces also generate friction (not to mention considerable publicity) by skirting regulatory frameworks. In time, they are almost always called back to account, as we see happening now with such disruptors as Uber, Airbnb and Bitcoin. Investors react to this with uncertainty, and capital that could be used to spur innovation is held back.

If assurance professionals could provide reliable principles and guidance on how new solutions could secure approval, the world would beat a path to their door.  Regulation might be seen to stimulate business rather than stymying it. This is more than just philosophical musing; there are opportunities are available here and now.  Here are a couple concrete examples:

Blockchain

Blockchain solutions are easier to implement than the solutions they replace.  But modern architectural best practice is to protect sensitive customer data by keeping it inside a firewall; blockchain solutions fundamentally and radically defy this principle by distributing a copy of this data to every other participant in the trading network, typically the enterprise’s direct competitors.  Architects therefore have no sound basis for approving blockchain solutions for production use, even if the solution would actually improve the safety of the customer data.  Assurance professionals who could give architects a fundamental set of business principles upon which to approve blockchain solutions would find themselves in great demand.

ICO’s

Initial Coin Offerings have raised more money this year than all traditional venture funding sources combined.  Unfortunately, the characteristics of this investment boom resemble pretty much every investment bubble in history, and the utter lack of due diligence with which people are throwing money into ICO’s is appalling.  If assurance professionals were to provide a framework of proper due diligence, both companies and investors would welcome such a framework now; Once the bubble does burst, regulators will be actively looking for a set of principles to adopt in order to protect people going forward.

Assurance professionals, like many other financial services providers, run a significant risk of being disintermediated. But they also have a huge opportunity to make themselves incredibly relevant to current and future waves of innovation.  The difference is getting involved.

Areiel Wolanow is the managing director of Finserv Experts, an independent consulting firm offering advisory and solution delivery services in blockchain, machine learning, and innovation adoption.

17 Dec

New Tool Helps Audit Committees Assess Implementation of New Revenue Recognition Standard

The Center for Audit Quality (CAQ) in USA released a tool to help audit committees assess a company’s implementation of the new revenue recognition standard, which will take effect for many public companies on January 1, 2018.

With little more than a year before the standard takes effect, only 17 percent of public companies report being in the implementation phase, according to a recent survey of executives by PwC and the Financial Executives Research Foundation. Seventy-five percent indicate that they are still assessing the impact of the new standard, while 8 percent report that their company has not begun assessment and implementation.

Cindy Fornelli, Executive Director at CAQ said:

Oversight of the implementation of new accounting standards is an important part of the audit committee’s responsibilities, and revenue is one of the most important financial reporting measures.
The CAQ is pleased to provide this tool to help audit committees oversee the implementation of the new standard, including their interaction with external auditors on the subject

The CAQ’s Preparing for the New Revenue Recognition StandardA Tool for Audit Committees is organised into four sections to provide audit committees information that may be helpful.

  1. Understanding the New Revenue Recognition StandardWhat Is It? This section provides a brief overview of the core principles of the standard.
  2. Evaluating the Company’s Impact Assessment – How Will Revenue Recognition Change? This section assists audit committees in discussing with management and auditors the impact of the new standard due to various factors related to the company’s business.
  3. Evaluating the Implementation Project Plan – How Do We Need to Prepare? This section assists audit committees in their efforts to understand and evaluate management’s implementation project plan.
  4. Other Implementation Considerations – What Else Do We Need to Consider? This section assists audit committees with other considerations such as transition decisions and new disclosure requirements.

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In addition to key questions for audit committees, the tool offers audit committees a list of the resources on revenue recognition that have been developed by CAQ member firms and the American Institute of CPAs.

FASB and the IASB jointly issued the sweeping new revenue recognition standard in 2014.

For more CAQ resources related to audit committees, visit the CAQ’s audit committee resources page.

01 Sep

TEN KEY CHALLENGES FOR ASSURANCE ENGAGEMENTS

IAASB Global Accountant AuditThe IAASB’s Integrated Reporting Working Group, dedicated to exploring emerging forms of external reporting (referred to as EER), has released a Discussion Paper, Supporting Credibility and Trust in Emerging Forms of External Reporting: Ten Key Challenges for Assurance Engagements.

IAASB Chairman Prof. Arnold Schilder said:

The IAASB needs to be at the forefront of the debates on external reporting and how professional accountants and other practitioners can contribute to enhancing credibility and trust. We hope this paper furthers the debate and helps us gain a deeper understanding of how the IAASB, as the global assurance standard setter, can contribute to the quality of different engagements, in the public interest, and where others can or need to play a role

The Discussion Paper explores:

  • the factors that can enhance credibility and trust, internally and externally, in relation to emerging forms of external reports;
  • the types of professional services covered by the IAASB’s international standards most relevant to these reports, in particular assurance engagements;
  • the key challenges in relation to assurance engagements; and
  • the type of guidance that might be helpful to support the quality of these assurance engagements.

The Discussion Paper also sets out the principal findings from research and outreach regarding developments in EER frameworks and professional services most relevant to EER reports, irrespective of whether such reports are part of the annual report or published as separate reports.

Merran Kelsall, IAASB member and Integrated Reporting Working Group Chair, said:

External reporting is evolving and we know various professional services are being performed, including assurance engagements in accordance with the IAASB’s international standards. We have identified ten key challenges in relation to assurance engagements that we would like to explore further, recognising the need for flexibility in these services as the external reporting environment continues to evolve and mature

The Working Group is seeking input from investors, preparers, those in governance roles, standard setters, practitioners, internal auditors, regulators, academics, and other stakeholders in the external reporting supply chain. The input will assist the IAASB in effectively responding to these developments in the public interest, including whether new or revised international standards or guidance may be necessary.

The Working Group has also developed materials to supplement the Discussion Paper, including FAQs. This material, as well as more information and updates on the project, are available on the IAASB’s project page at www.iaasb.org/auditing-assurance/projects/integrated-reporting-working-group.

Comments to the Discussion Paper are requested by December 15, 2016.

21 Jul

FRC consults on adopting international auditing standards to facilitate public assurance of insurers’ Solvency II reports

FRC_LogoThe Financial Reporting Council has released a consultation on the adoption of ISA 800 and 805 in the UK. This document seeks views on whether stakeholders believe it is appropriate to adopt these ISAs or if there is an alternative approach to support the Prudential Regulation Authority’s (PRA) proposed audit requirement for public reporting in the insurance sector under Solvency II. It also seeks views on whether there are any risks associated with this proposal, and whether it would be appropriate to make UK specific adaptations to the standards.

The ISAs provide a framework for the provision of reasonable assurance opinions by auditors on particular matters. In particular the FRC considers that their adoption could provide a framework for auditors in providing opinions on aspects of Solvency and Financial Condition Reports, as proposed by the PRA.

Melanie McLaren, Executive Director of Audit said:
Melanie Mclaren FRC Global AccountantThe FRC is carrying out this consultation in order to support the provision of high-quality assurance over public regulatory reports, in order to underpin user confidence in the information they contain. Based on our stakeholder engagement to date, we believe that auditors may have difficulty in accepting an engagement to audit Solvency and Financial Condition Reports in accordance with current ISAs (UK). This is because the current ISAs (UK) are designed for the audit of full sets of general purpose financial statements, rather than elements of special purpose reports
Comment on the consultation in response to this invitation to comment should be sent to:

James Ferris, Project Director, Financial Reporting Council
Email: AAT@frc.org.uk

The consultation closes at 5pm on 3 October 2016.

06 Jun

Where next with assurance? Asks ICAEW in their latest consultation paper

ICAEW is asking for responses on its latest paper on assurance models. As part of its series on how audit and assurance can meet the needs of today’s organisations and stakeholders, the accountancy and finance body has published Where next with assurance? The Journey Milestone 5. Respondents are asked to reply by 22 July.

The old model for assuring business information, the audit of the annual financial statements, is not always sufficient to meet modern needs, according to ICAEW. 

This thought leadership paper continues ICAEW’s series, The Journey. Its aim is to review the current state of the assurance debate and a series of propositions on where, and how, assurance should be taken next.

Ruth Ward, Technical Manager at ICAEW Assurance, Audit & Assurance Faculty said:

Assurance is critical to generating trust in information. ICAEW has been tracking the development of the assurance market and we’ve seen that savvy businesses are increasingly sophisticated in the way that they coordinate their risks, information flows, and assurance maps. We think it is now time to seek feedback from assurance providers, regulators, preparers and users of information to gain more insight into where to take assurance next. Those who rely on annual reports or financial statements, should be given trustworthy information to make the right business decisions

ICAEW calls for comments on the following statements;

  1. Rather than focusing on the annual report – or any other single report of an organisation – we should think about the right way to use assurance to meet the needs of the organisation itself.
  2. The role of the board in determining the need for assurance, internally and externally, is vital to understanding the future of assurance.
  3. Getting the right assurance in the right place is essential. This means asking the right questions about risks and information flows, and in a complex organisation it means keeping track of the situation with an assurance map.
  4. Assurance can be provided over risk disclosures or forward-looking information, even if the question asked is different from ‘is this true and fair?’.
  5. Assurance can add value to narrative information using current principles and techniques, and the skilled judgement of preparers and assurance providers.”

Where next with assurance? The Journey Milestone 5 can be found here.

24 May

IAASB WELCOMES US PCAOB’S EFFORTS TO ENHANCE THE AUDITOR’S REPORT

IAASB Global Accountant AuditThe IAASB welcomes the release by the US PCAOB of its re-proposed auditing standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. The PCAOB’s re-proposal would require auditors conducting audits under PCAOB standards to provide information on critical audit matters (CAM) in the auditor’s report, in addition to other enhancements.

In September 2014, the IAASB finalised its new and revised Auditor Reporting Standards, which will be effective for December 2016 year-end audits. The IAASB’s most notable enhancement is the communication of Key Audit Matters (KAM) for listed entities.

Prof. Arnold Schilder, IAASB Chairman said:

The IAASB is delighted to see the many similarities between the PCAOB’s re-proposal and the IAASB’s standards. Comparable approaches to auditor reporting around the world will clearly benefit investors and is in the public interest. We commend the PCAOB for taking steps to enhance transparency for investors and to further global consistency.We have heard from early adopters around the globe that enhanced communication in the auditor’s report has reinvigorated discussions with management and audit committees and inspired auditors to be innovative in their auditor’s reports

The IAASB’s Auditor Reporting Implementation Working Group (ARIWG)[2] has prepared a publication, The New Auditor’s Report: A Comparison between the ISAs and the PCAOB re-proposal, to assist interested parties in understanding key aspects of the two proposals.

Dan Montgomery, Chair of the Working Group, commented:

It is beneficial that both the IAASB and PCAOB approaches look to communications with those charged with governance as the starting point to determine matters for inclusion in the auditor’s report, as investors have long asked for greater transparency about the types of matters that are discussed with the audit committee. While the two approaches may differ somewhat in terms of definitions and the decision-making process, we believe that many of the same types of matters will ultimately be communicated

Kathleen Healy, IAASB Technical Director, highlighted:

The IAASB devotes much attention to outreach and coordination with the PCAOB and other regulators and standard setters, as well as with a variety of other important stakeholders, including investors and firms. This reflects the importance we attach to achieving auditing standards that can be applied consistently in a complex, evolving global environment, and facilitates convergence

The IAASB is an observer to the PCAOB Standing Advisory Group (SAG) and Prof. Schilder recently presented at the May 18–19 SAG meeting on topics of mutual interest and ongoing coordination. The PCAOB also participates as an observer to the IAASB’s Consultative Advisory Group.

To access to the new and revised IAASB Auditor Reporting standards, more information about the changes to the auditor’s report, and other Auditor Reporting toolkit materials, please visit www.iaasb.org/auditor-reporting.

18 May

ACCA responds IAASB’s proposal ITC to enhance audit quality

ACCA has responded to IAASB’s Invitation to Comment, Enhancing Audit Quality in the Public Interest: A Focus on Professional Skepticism, Quality Control and Group Audits (the ITC).

ACCA believes that the ITC brings together a number of important auditing issues and presents a full and thorough analysis to improve auditing standards. The response reflects the views from the ACCA Global Forum for Audit and Assurance, and has considered the views that arose at the ACCA roundtable on audit quality, hosted in Kuala Lumpur, Malaysia in April 2016.

In many of the areas identified, clarified International Standards on Auditing (ISA) set out clear expectations of auditors. Where auditors are seen as needing further guidance, they could be supported through application material or other forms of communication, such as thematic blogs or speeches. Such informal communication methods can help shed more light on the IAASB’s intentions.

The IAASB has been led by feedback from regulators and audit oversight bodies in drawing up the list of issues to enhance audit quality. Whilst this ensures that the IAASB’s proposals are responsive to the concerns of regulators, it means the proposals within the ITC might be seen as being wholly regulatory-led. This reinforces a regulatory view of audit quality, where audit quality is eroded by a failure to follow ISAs to the satisfaction of audit oversight bodies, but there is limited recognition of innovations which boost audit quality.

Andrew Gambier, Head of Audit and Assurance at ACCA, said:

ACCA_logoACCA supports and encourages the IAASB in developing a wider concept of audit quality. A symptom of the regulatory approach to audit quality is that many of the proposed actions relate to ‘strengthening documentation requirements’ in order that audit work undertaken, particularly as it relates to group audit situations, can be reviewed by regulators.

ACCA will continue to work with the IAASB in helping translate the findings they get from the ITC into proposals for revised standards. This is a very significant consultation, and we commend the IAASB staff and board for conducting this process in such a transparent and open way.

28 Apr

Revised UK Corporate Governance Code

FRC_LogoThe FRC has issued final draft updates to the UK Corporate Governance Code and the associated Guidance on Audit Committees to reflect forthcoming UK legislation on audit committees and auditor appointments. The FRC has committed to avoid further updates to the Code until at least 2019.

At the same time the FRC has issued final drafts of revised Auditing and Ethical Standards to support the work of audit practitioners in delivering high quality audit, and thereby underpin investor confidence. The revised standards reflect the FRC’s own review of ethical matters, changes to legislation which, after Parliamentary Scrutiny, are intended to take effect on 17 June 2016, and developments in international standards. The FRC has introduced all of the changes in a single revision to standards to ease the process of implementation as well as reduce costs.

The changes strengthen auditor independence by applying prohibitions to a range of engagements that could result in an auditor facing a conflict of interest. Reflecting the FRC’s commitment to proportionate regulation, the revised standards contain some reliefs which will allow, in certain circumstances, an auditor to provide additional assistance to smaller and medium sized entities.

The FRC has issued the final drafts now to enable companies and their auditors to familiarise themselves with the new requirements in good time.

Melanie Mclaren Executive Director Audit, said,

Melanie Mclaren FRC Global AccountantThe updates to the Code, Guidance and Standards implement a significant change in audit regulation in the UK which will be overseen by the FRC as a competent authority with the support of the accountancy professional bodies. The changes will support further innovation by the audit profession in the UK, and ensure that auditors act in a way that is genuinely independent and seen to be in the public interest. The UK has led the way on promoting audit transparency and competition on quality so that investors can have confidence in corporate reporting