Audit

Exactly one year to the day after his review was announced, and available a couple of weeks earlier than anticipated, Sir Donald Brydon has published his report into the quality and effectiveness of audit. The report, which the UK Government commissioned, looks at the provision of audit services to UK Public Interest Entities, acknowledging that it could impact on the services provided by auditors beyond the UK. In June 2019, Chartered Accountants Ireland responded to the consultation with a lengthy submission. We had previously engaged with the other two key consultations/studies relating to the UK audit sector, namely the CMA’s Statutory Audit Services Market Study and the Independent Review of the Financial Reporting Council by Sir John Kingman.    The recommendations in the newly published report warrant careful consideration as they propose some radical shifts for both the auditing profession and the directors of businesses in the UK.  The recommendations include: A redefinition of audit and its purpose; The creation of a corporate auditing profession governed by principles; The introduction of suspicion into the qualities of auditing; The extension of the concept of auditing to areas beyond financial statements; Mechanisms to encourage greater engagement of shareholders with audit and auditors; A change to the language of the opinion given by auditors; The introduction of a corporate Audit and Assurance Policy, a Resilience Statement and a Public Interest Statement; Suggestions to inform the work of BEIS on internal controls and improve clarity on capital maintenance; Greater clarity around the role of the audit committee; A package of measures around fraud detection and prevention; Improved auditor communication and transparency; Obligations to acknowledge external signals of concern; Extension of audit to new areas including Alternative Performance Measures; and The increased use of technology. The report states very clearly that the directors have a role to play in corporate reporting.  We welcome the recommendation that the board should have enhanced responsibilities regarding the viability of the company and should produce a Resilience Statement that builds on the current going concern and viability statements. The report recommends the consideration of an internal controls review along the lines of the US SOX reports. In our letter we advised caution regarding this and that further work/evidence is required to justify the introduction of such a costly regime. In our response to the consultation we commented that the developments in auditor reporting in recent years have been very beneficial.  The introduction of commentary on ‘key audit matters’ (KAM) and discussion of materiality issues provides rich information for users of financial statements and that   this could be further developed by auditors commenting on KAMs year on year.  We are pleased to note that the report recommends such follow up. Audit fees will be more upfront in the financial statements and audit firms will be required to publish the profitability of their work from audit. They will also be asked to disclose, “within the audit report, the hours spend on each audit by each grade within the audit team”. This can only lead to much lengthier reports. In addition, it is proposed that auditors are given the freedom to include a wider range of material in their report as they feel appropriate. This will be a significant change for the current reporting and would rely heavily on the professional judgement of the auditor. Sir Donald Brydon stated “I recommend that auditors should be free to include original information, materially useful to a wide range of users, in their audit report and at the AGM, and not be confined to commenting on that which has already been stated by directors.” We look forward to the discussions and debates that this report will no doubt generate and we will be publishing commentary and further analysis in 2020.    

Dec 20, 2019
Ethics

Chartered Accountants Ireland has responded to the FRC Feedback Statement and impact assessment relating to its review of 2016 Auditing and Ethical Standards In our response to the FRC we highlighted our primary concerns about the proposed updates to the standards.  We consider that it is essential that the FRC allow sufficient time for the 2016 standards to be fully embedded and for full consideration to be made of the overall impact of proposed further changes deriving from the reviews undertaken by Sir John Kingman and the Competition and Markets Authority, and the ongoing work being undertaken by Sir Donald Brydon in relation to the quality and effectiveness of audit. In our opinion, introducing an intermediate set of changes to standards prior to completion of that full consideration poses significant risk, given that it places auditors in a position of having to make changes on a piecemeal basis, in the knowledge that further changes will be required in response to those three reviews.   We also have significant reservations about certain aspects of the proposed changes to the Ethical Standard and the proposed extra territorial application of UK rules. On a similar note we have concerns about any divergence of FRC standards from the International standards given the number of groups with companies based in the UK, Europe and elsewhere.   In February 2019 we responded to the previous FRC consultation on the standards. Both responses can be read here: September Response February Response Our response to the Brydon Review  in June of this year can be accessed here.     

Oct 02, 2019
Audit

Three separate reviews in relation to the UK Audit Sector are at various stages of progress: Brydon Review 'Independent review into the Quality and Effectiveness of Audit' - call for views issued on 10 April 2019; Kingman Review 'Independent review of the Financial Reporting Council' - report issued in December 2018, BEIS Consultation ongoing on various recommendations; CMA Study of the UK Statutory Audit Services Market - two consultations completed and final report just published. The ‘Brydon Review’ of quality and effectiveness of audit Following the announcement in December 2018 of the appointment of Sir Donald Brydon by the UK Department for Business, Energy & Industrial Strategy (BEIS) to carry out an independent review into the quality and effectiveness of audit, the Brydon Review issued a call for evidence on 10 April 2019.   The consultation document contains 60 consultation questions on a wide range of matters, including: The ‘expectation gap’; The scope and purpose of audit; Communication of audit findings  and binary audit opinion versus graduated disclosure of auditor conclusions; The auditor’s role in relation to directors’ compliance with relevant laws and regulations, in particular capital maintenance and distributions; The auditor’s role in relation to fraud; Auditor liability issues. Submissions to the Brydon Review call for evidence will be accepted until Friday 7 June 2019.  The consultation document is available at this link. Kingman review, CMA review; BEIS Committee report As previously reported, the Kingman report on the FRC, issued in December 2018, contained 93 recommendations.  The FRC is working voluntarily to take forward 48 of those recommendations.  BEIS is meanwhile consulting on a range of other recommendations contained in the report, some of which will require primary legislation but many which can be implemented in advance of legislation following consultation on significant policy choices.  The consultation document is available at this link. Submission date for responses to the BEIS consultation is 11 June 2019. The Competition and Markets Authority (CMA) issued two consultations in its study of the UK statutory audit services market, in October and December 2018.  The CMA has just published this morning (18 April 2019) its final report arising from this study, which includes among the recommendations, a recommendation for an operational split between the audit and non-audit practices of the Big Four firms. The final report is available at this link. In addition the UK Business, Energy and Industrial Strategy Committee issued a report ‘The Future of Audit’ on 2 April on its  inquiry launched in November, which included oral evidence sessions between January and March 2019.  The report and further details are available at this link. A formal UK Government response will be made to the select committee report. The Institute, in its role as a recognised Supervisory Body under UK law, made submissions to the above Kingman and CMA consultations and continues to monitor closely and engage with the various consultation processes as they progress.

Apr 18, 2019
Audit

As reported previously in Chartered Accountants News, the UK Competition and Markets Authority (‘CMA’) commenced in October 2018 a study of the UK statutory audit market, aimed at enhancing market choice, competition, quality and resilience.  The CMA issued for consultation an update paper in December 2018, which included a revised package of proposals, including: Regulatory scrutiny of auditor appointment and management with a view to securing audit committees’ accountability and independence; Mandatory joint audit with a view to breaking down barriers to non-Big Four firms; An operational split between the audit and advisory businesses of audit firms, aiming to address identified conflicts between the provision of audit and non-audit services while mitigating against some of the key negative consequences of alternatively introducing full ‘audit-only’ firms; and Peer review of audits prior to the opinion being signed. Chartered Accountants Ireland responded to the CMA consultation last week.  Some of the key points raised in our response include: Support for proposed measures, properly resourced, that would enhance the support provided by the audit regulator to the work of audit committees; The need for further detailed evidence based analysis and consultation on appropriate frameworks to support a proposal to implement either joint audit and/or market share cap measures; Appropriate revision to the auditor liability regime  should the mandatory joint audit proposal be implemented; The Institute does not support a full structural split of audit firms and considers that there is insufficient evidence based analysis available currently to support a proposal of an operational split; and Very significant concerns as to how peer review of audits by other firms in advance of signing audit opinions could be introduced in a workable/practicable given current corporate reporting timelines, including potentially increased risks to audit quality. The full Chartered Accountants Ireland submission is available on our website and can be accessed by clicking here.

Feb 07, 2019
Audit

Following consultations earlier in 2018, this week has seen the publication of two very significant reports on the regulation and operation of the UK statutory audit market. Sir John Kingman issued the Independent Review of the Financial Reporting Council (‘Kingman Report on the FRC’) while the Competition and Markets Authority (‘CMA’) issued its update paper on the Statutory Audit Services Market Study (‘CMA update paper’). Institute Chief Executive Barry Dempsey comments on these developments. CMA update paper The original CMA invitation to comment (‘ITC’) in October 2018 contained a wide range of potential measures, aimed at increasing competition, enhancing incentives to better align audit services to shareholder interests, improving market choice and opportunities for switching auditors and bolstering the resilience of the UK audit market, particularly against the failure of one of the Big Four audit firms.  Following the consultation, to which Chartered Accountants Ireland made a detailed submission (submission at this link), the CMA has developed a proposed package of remedies to address the key concerns in its study, including three core proposals: Regulatory scrutiny of auditor appointment and management, with a view to securing audit committees’ accountability and independence; Mandatory joint audit, with a view to breaking down barriers to non-Big 4 firms; An operational split between the audit and advisory businesses of audit firms, aiming to address identified conflicts between the provision of audit and non-audit services, while mitigating against some of the key negative consequences of alternatively introducing full ‘audit-only’ firms. Other remedial measures discussed in the update paper include peer review prior to the accounts being signed off.  The above remedies are discussed in the update paper as preferred alternatives to other measures originally proposed in the ITC (e.g. an independent body to appoint auditors, market share caps and fully audit-only firms), though the update paper suggests that the CMA may take future steps in relation to these should sufficient progress not be made via the current proposed package of measures.  Potential measures in the original ITC not being pursued by the CMA include the break-up of the Big 4 firms and the creation of a national audit office (NAO) style auditor for private sector audits. The CMA is now consulting on this proposed package of measures until 21 January 2019 with final recommendations expected by April 2019.  Chartered Accountants Ireland will again participate in this consultation. Kingman report on the FRC Following the Kingman Review’s call for evidence, to which Chartered accountants Ireland responded in detail in August 2018 (submission at this link), the Kingman report calls for the replacement of the FRC with a new independent regulator (suggested title: ‘Audit, Reporting and Governance Authority’) with clear statutory powers and objectives.  It recommends that the new regulator should be accountable to the UK parliament.  In total there are 83 different recommendations addressing the structure and purpose of the regulator, the effectiveness of its core functions, the role and powers of the regulator with respect to corporate failures, oversight and accountability, staffing and resources, and other matters.  Some key recommendations include: The new regulator taking responsibility for the approval and registration of audit firms which audit UK PIEs from the Recognised Supervisory Bodies (including Chartered Accountants Ireland); Enforcement action against accountants in relation to apparent wrongdoing in public interest entities should be undertaken on a statutory rather than voluntary basis, as is the current arrangement; That the regulator has the powers to investigate the actions of all directors, not just those who are members of accountancy bodies; The introduction of a duty of alert for auditors to report viability or other serious concerns to the regulator; Giving the regulator powers to commission a ‘skilled person review’, paid for by the company, in relation to its strategic objective to “protect the interests of investors and the wider public”, and to publish such a report if it is judged to be in the public interest; That the Department for Business, Energy and Industrial Strategy (‘BEIS’) give serious consideration to a strengthened framework around internal controls; That staff, board or committee members are prohibited for the foreseeable future from working on any regulatory functions relating to a past employer; Enhanced obligations with regard to the review of the audit market; and That BEIS should put in place a statutory levy and the current voluntary funding approach should cease. Next steps As noted above, the CMA is further consulting on its proposed package of proposals.  In addition, BEIS has announced an independent review, to be chaired by Donald Brydon, outgoing Chair of the London Stock Exchange Group, on the quality and effectiveness of the UK audit market.  BEIS has said that the Brydon review into UK auditing standards will build on the Kingman and CMA reports by considering “how far audit can and should evolve to meet the needs of investors and other stakeholders”.  Chartered Accountants Ireland Chief Executive Barry Dempsey commented on these developments as follows: “We at Chartered Accountants Ireland welcome the publication on Wednesday of both the CMA update paper on its UK statutory audit services market study and the Kingman report on the FRC.  There is widespread agreement that audit quality must be at the heart of any reforms in the sector and that steps be taken to restore public trust and confidence in the statutory audit function.  We also welcome the announcement of the Brydon review into the scope and purpose of the audit, aimed primarily at substantively closing the gap to stakeholder expectations of the audit.  Whilst we, and indeed other stakeholders, may not agree with everything that is proposed, we fully recognise the importance of the on-going debate. The response to the recommendations contained in these reports and reviews will be pivotal to achieving these shared aims of high quality audit and high levels of public trust and confidence.  Of course it is critical that any changes implemented in the UK can work in the global context of the auditing profession.  In our CMA response we highlighted the need for coordinated solutions to enhance corporate reporting and statutory audit globally. The proposed measures address complex issues and their design will be critical in terms of implementation and effectiveness.   Chartered Accountants Ireland has submitted detailed responses to both the CMA and Kingman consultations and looks forward to engaging further on these matters as they develop”. 

Dec 21, 2018
Audit

IAASA has this week published a Consultation Paper to seek the views of stakeholders regarding the Authority’s intended policy on publication and grading in the quality assurance review process relating to statutory auditors and audit firms that carry out statutory audits of public-interest entities ('PIEs').

Nov 29, 2018
Audit

Chartered Accountants Ireland, in its capacity as a Recognised Supervisory Body (RSB) in the UK, responded recently to the consultation issued by the UK Competition and Markets Authority (CMA) on the statutory audit market. The CMA consultation was structured around five main themes – (1) Scope and purpose of audit, (2) Initiatives, (3) Choice and switching, (4) Resilience of the audit market, and (5) Regulation of audit in the UK, focussing primarily on themes (2) to (4).  The consultation paper contained a wide range of potential measures including further restrictions on non-audit services, audit-only firms, break up of the Big Four firms, independent bodies responsible for appointing auditors to companies and a national audit office style approach to statutory audit.  The Institute’s response can be read in full by clicking on this link  It addressed the individual measures proposed in the consultation paper and some of the key points included: Given the importance of the issue, we have called for a much more in-depth, detailed and evidence based consultation is necessary to allow all stakeholders to provide considered responses. Many of the proposed measures are untested, whereas there may be evidence available to the CMA and other stakeholders on certain other potential measures in other jurisdictions. The CMA consultation is not operating in isolation and we stated that it needs to be coordinated with other processes, such as the Kingman FRC review in the UK, the Monitoring Group consultation on the future of international audit standard setting, recently implemented EU changes with regard to statutory audit in the European Union and changes to corporate reporting requirements, such as the viability statements, in the UK. We consider that there is merit in more detailed consideration of further restrictions on the provision of non-audit services to PIE audit clients. In considering such measures, it would be critically important to clearly distinguish audit-related services which must be undertaken by the auditor from non-audit services which may be provided by any professional accounting firm. We consider that there may also be merit in further detailed consideration of joint and shared audits, and such consideration should incorporate evidence available internationally. We also see merit in some but not all of the proposals addressing greater transparency in the tendering process, and further than public interest entities themselves could be encouraged to provide more transparent reporting with regard to their own tendering processes and the governance of those processes. We consider that there are significant challenges to be overcome in pursuing proposals regarding market share caps. We do not support inter-alia proposals to have audit-only firms, to have statutory audit appointments handled by an independent body or that statutory audits be undertaken by an ‘NAO-style’ national auditor. Economia, the ICAEW’s member publication, has written an article with a high level comparison of the views of the UK RSBs, including Chartered Accountants Ireland, on the individual measures proposed.  Please click here to access the Economia article. We look forward to engaging with further consultation on this very important topic.  The CMA consultation paper can be accessed at this link.

Nov 16, 2018
Press release

On Tuesday afternoon last (23 Oct 2018), a panel drawn from all stakeholders in the audit market, including auditors from the larger and mid-tier audit firms and business leaders told a capacity audience in Chartered Accountants House that the statutory audit is here to stay and continues to deliver a valued service to investors and shareholders. However, in a climate of increasing regulation of all professions, audit practitioners may have to come up with fresh approaches to remain relevant. The benefits and challenges from the imposition of a tighter regulatory audit regime was also debated. Session 1:  Value of Audit Lead Speaker: Michael Cawley, NED and Chair of Audit Committee in Betfair Paddy Power, Kingspan. Panellists: Michael Cawley Andrew Keating, CFO Bank of Ireland Brendan Jennings, MP Deloitte Barry Dixon, Head of Research, DAVY Sinead Donovan, Partner GT  Session 2:  Future of Audit Lead Speaker: Pat O’Neill, Partner EY Panellists: Pat O’Neill Kevin Prendergast, CEO IAASA Ken Bowles, CFO Smurfit Kappa Group Ciaran Hancock, Business Editor, Irish Times Pat Cox, NED and Chair of Public Interest Committee at KPMG Emma Scott, Partner PwC Over 180 delegates at Chartered Accountants Ireland’s conference on ‘The Value and Future of Audit’ were comprised of business leaders, chairs of audit committees, analysts, and preparers of financial information and practitioners who engaged in a lively debate. They heard that that the statutory audit is at a crossroads, with increased scrutiny on the value, quality and purpose of audit.   The debate ranged over a wide range of audit related issues including: The need for greater competition and choice in the audit market and the impact (or not) of the recently introduced EU audit reforms; the societal needs from the statutory audit and whether the audit as currently designed was capable of meeting them; the impact of regulation on the mind-set of auditors and the attractiveness of audit as a professional career. While competition between the larger audit firms is significant, there was an acknowledgement that there are currently too few players in the PIE audit market sector. Possible remedies to this that are currently being debated in the UK include: audit only firms; market share caps; joint or shared audits; total prohibition of provision of non-audit services to audit clients. However we need to be certain that any local remedies are responsive to the particular market in Ireland and also sensitive to the risks of unforeseen consequences. It is not at all evident that these proposed remedies were necessary or relevant in Ireland. Speakers argued that the so-called expectation gap was only partially real. In their experience consumers of audit services, practitioners, regulators, audit committees, boards and analysts all understand the limitations of a statutory audit. However some challenges are less understood in other quarters.  In addressing this gap in perception, the choice is either change perceptions through engagement and communication, or move to meet those expectations and change the audit model. If statutory audit is not meeting the needs and expectations of society then clearly it needs to change.  However, debates and discussions about the nature of such change need to begin from informed positions about what audit currently delivers and the challenge it provides before exploring how it might evolve into the future.  Panellists suggested that some commentators want assurance on businesses that an audit as currently designed can’t provide, and it is up to the profession to communicate the function and limitations of the statutory audit as a foundation for an informed debate.  Speakers argued that, if one of the desired outcomes of the new EU rules governing audit is to avoid binary, pass/fail audit opinions in favour of richer, more nuanced reporting, then the imposition of tighter regulation will have the contrary effect.  In a highly regulated environment the fear would be that the real problems are ignored and instead practitioners just concentrate on being seen to comply with auditing standards instead of adding insight and value. Over-regulation could in fact lead to audits having an increasingly technical focus instead of offering judgement and opinions on points of improvement. This in turn could impact the attractiveness of the profession to high-quality people and its very sustainability. Delegates heard that the audit needs to innovate in order to add value and offer deeper judgement and insight on structures of the business and business model.  One example of innovation put forward concerned how financial results are portrayed in annual reports, and these could be communicated in a more transparent and accessible manner.  Final remarks at the conference went to Irish Times Business Editor Ciaran Hancock, who gave a valuable external perspective.  Drawing attention to recent controversial business collapses where the performance of audits was brought into question, he suggested that the profession has to acknowledge when things go wrong. It is the duty of the media to investigate, and the reality is that interest in audit will only be generated when issues arise. Auditors should also have a clearer sense of their accountability to society, and need to significantly improve how they currently communicate. Mr Hancock said that there are issues with how the outcomes of audits are presented, and simpler, plainer English should be adopted. Deputy President Conall O’Halloran who chaired the conference said: “The idea of this event was to hear from a range of stakeholders who have an interest in statutory audit. “Ultimately, statutory audit is a global service and any remedies to address current problems, real or perceived, must be global. However, for Chartered Accountants Ireland to be able to provide informed comment on the future direction of the statutory audit, events like this are important. “The Institute will now consider the range of views heard in formulating its own contributions to the current debates on the future of audit”. Photos of the Audit event are available here.

Oct 26, 2018
Business Law RoI

Applications for renewal of licenses are due by 3 September 2018.   As members are aware, the Court requires an ‘Independent auditor's or accountant's certificate confirming up to date compliance with all filing and tax requirements pursuant to the provisions of the Companies Act 2014’. Having corresponded with the Court regarding why professional accountants should not sign such a certificate, the Consultative Committee of Accountancy Bodies-Ireland (CCAB-I) met with senior representatives of the Court in recent weeks, at which the attached report format was agreed. Members are advised to use this report format in fulfilling this requirement of the Licensing Court. The attached report will also be available via the Licensing Office in Áras Uí Dhálaigh. Dublin District Licensing Court _ auditor's or accountant's report_July 2018

Jul 20, 2018
Audit

It has been brought to our attention this week that the Valuation Office have issued  form LP1 Valuation of Licensed Premises to a large number of licensed premises owners as part of a national revaluation programme of commercial and industrial properties in Ireland for rates purposes.    The form requests certain figures to be extracted from the books and records of the licence holder and for an accountant to sign the form in addition to providing their professional membership details.  This form requests the signature of an accountant in a form that is not acceptable to professional accountants as it includes a requirement to “certify that the information provided is true and accurate in relation to the above subject property”.  As members are aware we consider that this is wording which accountants would not normally be in a position to use as it implies complete accuracy and absolute certainty. We advise our members not to sign the form but to send it with a covering letter confirming that the numbers have been extracted from the books and records of the licence holder.

Jul 13, 2018
Business law

Developments of interest this week are outlined. Northern Ireland and Republic of Ireland charity regulators to be included in new charity sector SORP-making body. ROI IAASA has published its annual Profile of the Profession, which contains statistical data regarding the nine Prescribed Accountancy Bodies (‘PABs’) within IAASA’s supervisory remit in Ireland for the year 2017. The Companies Registration Office annual report for 2017 is now available as a pdf from the  CRO Corporate Publications webpage or as a webpage: CRO report. The Registry of Friendly Societies annual report for 2017 is now available from the CRO Corporate Publications webpage. UK  The FRC has published its first list of companies whose reports and accounts have been reviewed by its Corporate Reporting Review function. International The June IASB podcast now available

Jul 05, 2018
Audit

We have published TR 03/2018 Licence applications under the Property Services (Regulation) Act 2011 and the Property Services (Regulation) Act (Client Moneys) Regulations 2012 Following consultation with the Consultative Committee of Accountancy Bodies-Ireland (“CCAB-I “), the Property Services Regulatory Authority has published revised forms of accountant’s reports for Licence renewal applications.  TR 03/2018 aims to provide updated guidance for our members when assisting their clients with the licence renewal process.  Information Sheets IS 02/2013  and IS 01/2012 have been withdrawn.  This Technical Release is based on the forms issued in April 2018. TR 03 2018 PSRA Licence Applications is available here

Jun 15, 2018