Archives For Audit

By Sue Almond, technical director, ACCA

reporting

 

I was fortunate to chair a roundtable on the future of audit while MEP Karim, rapporteur for the JURI committee on the EC audit proposals, was in New York recently on a fact-finding visit to understand more about the US and the global audit market, to consider the broader impact of the EU audit proposals. The roundtable attracted a wide range of attendees, and it was interesting to hear the perspectives from the US. Not surprisingly, much of the debate focussed on the critical EU proposals such as mandatory auditor rotation, tendering and non-audit services.

There were some general recurring themes that arose at the roundtable:

  • Although a single country, the US state system is not so different to EU member states – for example auditors are required to be registered with the state.
  • The distinction between public company audit (regulated by PCAOB and SEC) and private company audit (AICPA and state) is quite significant.
  • The rules on audit committees are set by the SEC. These tend to relate to the legal requirements, including independence of Audit Committee (AC) members, rather than the functioning of the AC, and there was strong support for an enhanced, and more transparent, role for the AC. There was general support for the role of the AC in evaluating non-audit service provision.
  • There was very strong disagreement with mandatory audit rotation across almost all sectors (in line with the feedback to the recent PCAOB consultation on the topic), and in fact the day before the roundtable a motion was tabled in Congress to prohibit any proposed rules on this. The practical impact on global businesses of potentially different mandatory rotation requirements in different jurisdictions was noted. However, it appears PCAOB may still be interested in pursuing rotation.
  • FASB will shortly publish going concern proposals. This is important because the current position is that management in the US have no requirement/responsibility to make a going concern assessment – it is purely the role of the auditor. This is causing significant problems for the IAASB in its auditor reporting project, where there is pressure for the auditor not to be generating ‘new’ information.
  • There was support for global standards, e.g. ISAs (International Standards on Auditing) and IESBA Code of Ethics.

MEP Karim published his final proposed amendments for the EU Audit proposals for vote just after the roundtable. They are very much in line with the position ACCA took on the original proposals more than 18 months ago:

  • We support adoption of global standards (e.g. ISAs, including on auditor reporting, IESBA Code, independence/non-audit services, ISQC1)
  • We support strengthening the role of the audit committee and increased transparency
  • We do not support mandatory rotation of auditors as we do not believe that there is evidence that supports an improvement in audit quality as a result
  • We do not support restricting the role of professional bodies, particularly in relation to the monitoring of auditors of unlisted entities.

Following the approval on MEP Karim’s report, the focus now moves to the Council. Let’s hope that they will recognise the good work that has been done in the Parliament as they now work on their revisions to the audit proposals …

Ian Welch

By Ian Welch, head of policy, ACCA

With pressure on public finances being at an all-time high on most countries – and public trust in both business and governmental institutions seemingly being at the other end of the scale – the role of finance professionals will come under increasing scrutiny.

Our new report, Setting high professional standards for public services around the world, analyses all aspects of public sector accountants’ roles and makes the crucial – and topical – observation that finance professionals must promote whistleblowing laws and policies to ensure that communities can have confidence in how their taxes are being spent.

Accountants have a critical role to play in rebuilding waning public trust by championing the cause of developing anti-corruption procedures and cultures. To do this, they will have to work with other stakeholders to help eradicate fraud and corruption, through a combination of education, fraud-awareness programmes and training in forensic accounting.

This is no easy task, but it can be done. In the UK, the newspapers are currently full of stories of scandals in the healthcare, social care and police sectors – all of which came to light through whistleblowing by public sector staff. The fear of retribution and repercussions are always there. But it is even more vital than ever, at a time of unprecedented constraints on public spending, that finance professionals feel able to highlight issues where public money raised through taxation is misspent or misused – and that those responsible can be held to account.

ACCA also calls for proper separation between the accounting and auditing functions within all governments. In some countries that does not exist, which impairs accountability and transparency. The report accepts there is a challenge in educating the populace about the audit process – and in making it more transparent – to ensure public confidence.

Yet it could be argued that the public sector is, in many ways, ahead of the private sector in this respect. The ongoing regulatory and political inquiries into the role of audit – highlighted in this space last month – reflect a wider public sense of dissatisfaction with the auditors of banks and other major institutions. ACCA has consistently argued that the role of audit itself needs to be extended to take in issues such as risk management, internal controls and corporate governance. And yet the public sector is already there – in most developed countries ‘value for money’ audits are the norm. These are notably wider in scope than their private sector equivalents.

Under VFM audits, not only do the financial statements receive a true and fair opinion, but the auditors also have to comment on aspects of corporate governance and the effectiveness of the organisation’s arrangements to secure value for public money. There is also a wider variety of reporting in the public sector, driven by its multiple stakeholders (politicians, citizens, investors, pressure groups etc) which require reporting innovations such as scorecards. Audits have to satisfy all these requirements and audiences, which can be challenging.

Yet many of these audits are done by the same firms who seemingly find innovation much harder to bring into their private sector work. In the UK, the long-awaited report by the Competition Commission on audit competition has just been published and among its findings, the Commission concludes that there is considerable ‘unmet shareholder demand with regard to information supplied by auditors’ and that by putting the demands of management ahead of investors, auditors ‘competed on the wrong parameters’. Overall, the Commission’s report is a fairly bleak assessment of the current situation.

It is however, weaker on practical remedies to improve the situation. Amazingly it doesn’t mention liability once – yet concerns over liability have been shown, via outreach carried out by ACCA and others since 2009, to be a serious deadweight on innovation. This issue simply has to be addressed.

But firms – and the wider profession – also need to reflect on whether there is more they can do to bring some of the more interesting aspects of public sector audits to bear on their private sector work. This really might start to bridge that intractable expectations gap.

This post first appeared in The Accountant in February 2013

By Ian Welch, head of policy, ACCA

Amidst all the focus on tax changes and economic forecasts in the UK Budget yesterday, accountants could be forgiven for not noticing an interesting announcement sneaked into the fine print: that the Government has called upon the Office of Fair Trading to assess whether bank clauses in lending agreements unfairly restrict competition in the audit market.

The surprise announcement – mentioned on page 78 of the 126 page Budget document issued jointly by the Treasury and Department for Business, Innovation and Skills comes just before the report of the House of Lords inquiry into audit competition, expected to be published next week. It seems to have stolen some of the thunder from the Lords' conclusions.

The Government seems to have been influenced by the OECD, which suggested last year that banks sometimes make loans to business contingent on having audits carried out by the Big Four. Mid-tier firms such as BDO and Grant Thornton told the OECD of the existence of such restrictive covenants and have been very vocal on the subject ever since.

The Financial Reporting Council, which examined the issue and urged companies to disclose any such clauses (though admitting that few do) yesterday promptly welcomed the Government's move, which seems to have been inspired by Vince Cable, who has previously urged action on the issue.

ACCA, in its own submission to the Lords inquiry, supported greater audit competition and specifically focused on the restrictive covenants issue (along with liability) as being one area where action could be taken, so we welcome any move that the OFT might take to prevent banks including any such anti-competitive clauses into its lending agreements.

Firms should have to demonstrate that they are the best-placed to carry out audit work – it should not be assumed and they certainly should not be given artificial 'help' in this way. Action in this area could genuinely increase competition by persuading 2nd tier firms that it is worth undertaking expensive and time-consuming tenders. At the moment they are understandably reluctant to do so in certain cases, believing they will not be given a fair crack of the whip. 

It will be interesting to see what concrete evidence the OFT unearths, but the very fact it has been asked to examine this issue by the Government increases the political pressure on the Big Four. You can be sure it will have been noted in Brussels, where EC Financial Services Commissioner Michel Barnier continues to deliberate on fundamental changes to the audit profession. He will also have noted in the Budget document yesterday that the UK intends to "press the European Commission to remove the audit requirement for most medium-sized companies in the lead up to the publication of a revised audit directive, expected in November 2011." This, it is understood, would mean companies of up to £25m turnover, a dramatic hike from the current level.

This is where ACCA parts company from the Government. You can make a fair case for SMEs not to have to undertake a full audit. But if you believe that good audit adds value to business – as we strongly do – then where should that line be drawn? The Budget document once again makes reference only to the 'savings' made by such plans – this time a conveniently eye-catching £200m – and not the downside of a dramatic increase in the number of businesses having no external check on their finances. Other EU member states do not even use the maximum threshold allowed under current rules, fearing that, in the current global economic uncertainty, doing away with audits may not be wise. Can the Government be so sure they are wrong without carrying out any impact assessment?

Armchair auditors?

theaccablog —  16 August 2010 — Leave a comment

By Gillian Fawcett, head of public sector, ACCA

Friday the 13th certainly lived up to its billing for the Audit Commission as the government chose the notorious date as the day to announce the end of 157 years of public audit as we know it. The chief executive's predictably not very pleased, as you can see from this memo, reproduced in the FT.

A move from having one centralised body to 'citizen power' instead is perfectly in-keeping with the 'big society' ideas of the government and the Audit Commission was perhaps in need of review, but scrapping the Commission outright could cost more than the £50m of potential savings identified.

When it comes to auditing its work, the public sector needs a coherent approach; authorities need to be clear on the processes and expectations involved in it. Much of the Audit Commission's work is already contracted out to large private sector audit firms, but the team that works out of the Commission itself ensure there is a consistency of approach. This won't be easy to achieve in future.

This source of centralised expertise was first available as the District Audit service which was consolidated into the Audit Commission in 2003. The Audit Commission and its district audit predecessors have been demonstrating best practice benchmarking and guidance for public sector officers for a combined total of 157 years and the accumulated wealth of knowledge and skills could be lost if the transition period to 2012 isn't handled properly.

The idea of an army of 'armchair auditors' may sound a great way of increasing citizen involvement in local government, but in reality very few members of the public actually look at their local authorities' accounts, even though they're already publically available.

When people do look, they will usually only do so to check out an area of personal interest – spending on children's play areas; recycling; park spending – rather than the accounts as a whole. Investigations into specific areas may be costly and might not be of the wider financial benefit for the public.

Going forward, there needs to be some form of co-ordinating structure put in place to avoid a public audit 'postcode lottery'.