Archives For Audit

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By David York, head of auditing practice, ACCA

An authoritative global survey of the views of smaller accountancy practices was published in March 2015 by the International Federation of Accountants. The survey concluded that the biggest challenge faced by firms was attracting new clients and half of those surveyed said they were concerned about differentiating their firm from the competition.

One UK firm that has cracked this problem is Green Accountancy. If you call yourselves Green Accountancy the differentiation from competitors is about as obvious as it can get.  But what lies behind this is an innovative service that any firm can add to its own service lines to give an edge in attracting new clients. In this case, clients that benefit from it may also get a ‘green advantage’ with their own customers.

ACCA has worked with Green Accountancy to promote this service. We issued detailed guidance in the form of Technical Factsheet 190, which is available as a free download on the ACCA website and crucially it is issued copyright free, to encourage firms, other accountancy bodies, or indeed anyone, to tailor it to their own needs: translate it, change UK to local figures, or include it in their own materials. The service is all about helping smaller businesses measure and reduce their main environmental impacts, so the more accountants that get involved in this the better. To quote ACCA Past President, Brendan Murtagh: ACCA believes that our members’ accounting and financial reporting skills have a key role to play in the transition to, and management of, the low carbon economy. By providing additional green accounting skills . . .  professional accountants will have a pivotal position measuring and managing carbon emissions.’

Recently we have released a video to introduce the service in detail and have put a transcript and the slide deck online.  There are also short articles that provide an overview: on the IFAC Global Knowledge Gateway as well as elsewhere on ACCA’s website.

The guidance was initially issued as ‘interim guidance’ because we wanted to improve it by responding to feedback from users. It is now (June 2015) due to be updated for 2015 year-end reporting and so, in addition to a feedback request in the factsheet itself (many thanks to those who have already provided their views) we have launched an online survey. The survey is not just for those who have introduced this service; anyone who has read the Factsheet can comment.  Please do so.

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Rosemary Hilary

By Rosemary Hilary FCCA, audit director, TSB

When I started my career I knew I wanted to have a respected qualification that would give me flexibility and choices.  As I was naturally attracted to the world of accountancy, ACCA seemed the number one choice for me.

I developed my early career in insurance (management accounting) and industry (financial accounting) and then I joined a commercial bank first as Internal Auditor then as Treasury Accountant.  From there I joined the Bank of England and that led to a fascinating period in financial services regulation, in a number of senior roles, transitioning to the Financial Services Authority and, briefly, the Financial Conduct Authority. In my last seven years at the FSA/FCA I was the Director of Internal Audit. My ACCA qualification provided an excellent foundation on which to develop the skills required for Internal Audit.

But in 2013, after working through the effects of the financial crisis, I decided it was time to return to my private sector roots in banking.

I joined the executive team at TSB, as Director of Internal Audit, in October 2013. Once again my ACCA qualification was a key factor that qualified me for the role and, on a day-to-day basis, I still draw on the skills and knowledge that I learned during my accountancy training.

TSB is a new challenger bank for Britain, but with a traditional and trusted brand and the capabilities of an established organisation. This sense of continuity and history is central to the new Bank’s culture – TSB is benefiting from the trust and reputation it built up over its long history and also setting out its own agenda as a straightforward and transparent bank pioneering a return to local banking for Britain. We still have a sense of the old TSB community and the essence of its values, but the new TSB provides an exciting opportunity to have a hard think about strategy and shape our role as a challenger bank.

I am now building up the Internal Audit function to the size and scale that we need for our operation in future. I’m doubling the size of the team to 40 internal auditors and will also bring in specialists when necessary. Apart from sheer intellectual ability, I am looking for the team to have the core skills that I feel I developed as part of my ACCA training. Top of the list is good communications skills. You must be able to write down findings clearly and be impactful when talking to colleagues.  Next is good stakeholder management – knowing how to convey messages as a ‘critical friend’ and with gravitas and ‘clout’ and the ability to inspire respect from colleagues across the organisation, including the Board of Directors. Internal Audit gives you a great, 360-degree view of the business-constantly taking the pulse of the organisation.

In addition to my work at TSB I also feel privileged to have been selected, four years ago, to be on the board of Shelter, the national homelessness charity.  As a member of its Audit, Risk and Finance Committee, my ACCA qualification provides the underlying skills and knowledge that I need.

David Walker, co editor of Breaking Out, is contributing editor at the Guardian

Public audit is breaking out. Its core task remains independent assurance that precious public money is spent lawfully and effectively. But the ‘in and out’ or ‘injection’ model for audit is no longer enough. Auditors are assuming a wider responsibility, bringing them closer to executive management.

In the different countries of the UK, as with Australia, Canada and emergent Kenya and Jamaica, auditors no longer report and run. Securing value for public spending increasingly demands their sustained presence. They are having to intervene earlier in financial decisions then stay to follow up, checking recommendations have been adopted.

This expanded role results from the crash and – in many countries – enforced austerity in public finance. Parliamentarians demand more assurance that the funds they vote for are buying the services intended. Media and civil society, mistrustful of politicians, turn to auditors as a check-and-fail safe. Permanent secretaries and agency heads enlist auditors to expand executive capacity.

The picture painted by contributors to Breaking Out, ACCA’s new collection of essays from leading public auditors, isn’t uniform. Political circumstances and the autonomy of audit institutions vary. Within the UK, devolution, and in Scotland’s debate about independence, has opened unprecedented vistas for auditor generals to survey wider landscapes, looking at financial viability decades ahead and – sometimes quizzically – at lines of demarcation between local and central government and between adjacent agencies and departments.

John Doyle, the auditor general of the Australian state of Victoria, says auditors must go beyond the traditional sweeper-up role and take a more muscular role, assuming joint responsibility with managers and parliamentarians for improving public sector performance. The view from Canada sees audit as a ‘real time’ contributor to effective spending decisions by civil servants – it should be an extra administrative resource.

Intervene earlier in the processes by which money is allocated to departments, says Amyas Morse, the Westminster parliament’s comptroller and auditor general, and problems can be nipped in the bud. Providing assurance earlier in the life cycle of a project can limit the impact of administrative failures, preventing them from snowballing.

So audit should be peering ‘upstream’ at how decisions are made within government departments and agencies. It must also look ‘downstream’ to how services are delivered. Downstream lie contractors and the increasing proportion of public services that are outsourced to private firms. Auditors are supposed to ‘follow the money’ – Professor Ron Hodges of Birmingham University and ACCA’s head of public sector, Gillian Fawcett, argue: the trail leads to auditors examining the performance of firms such as Serco and G4S. Private sector auditors are responsible for their accounts, but the work they do for the public sector – and what they are paid for it – are matters for public auditors.

But not all auditors welcome the new expansiveness. Marcine Waterman, controller of audit at the Audit Commission – the English government agency that is now being wound up – says auditors are not improvement advisers. They can hold a mirror up to a public body that is not performing, but must intervene sparingly and modestly.

What happens, asks John Muwanga, drawing on his experience as Uganda’s auditor general, when public demand for better services lands on the auditors’ desks. He is worried by the ‘expectation gap’ between what auditors can do and what the public thinks they must do.

And yet public auditors are not going to escape fiscal fate. As long as money is tight – and austerity looks set to last, compounded in the UK and across the European Union by the health and social care pressures of ageing – public and parliaments will demand more value for money. Short of an administrative revolution in which general managers themselves suddenly acquire new financial competence, the services of public auditors are going to be in high and growing demand.

oil barrels

By David York, head of auditing practice, ACCA

There is an old saying that a fool can ask a question that a wise man cannot answer. Actually, in the age of the Internet I should not say that. Not particularly because of a change in the tools available to the wise man, but because I ought to check the actual wording of the statement and clarify whether it is a saying, a proverb, a truism or some other particular part of the English language.

Just for once, I’m not going to reach for the tools. Instead, let’s examine a question: ‘Do users of audited financial statements believe the introduction of a new section in the auditor’s report describing the matters the auditor determined to be of most significance in the audit will enhance the usefulness of the auditor’s report? If not, why?’ It is best not to examine the wording of the question too closely else we begin speculating on the meaning of ‘useful’ in this context, or on whether those answering can be expected to predict the future.

The question is the first posed in a public consultation by the International Auditing and Assurance Standards Board (IAASB). This ‘exposure draft’ is huge at 200 pages and is hugely important. There is a proposed new auditing standard on communicating ‘Key Audit Matters’, major revisions to five existing standards and a raft of conforming amendments to others. This will bring about the most visible change in auditing globally for well over a decade. For a listed entity, the auditor will publicly report the most important of the matters already communicated privately to, for example the company’s Audit Committee. This is not just a cut and paste, as the audiences are different and the very fact of disclosure will inevitably affect how preparers and auditors treat a matter.

The exposure draft is a significant stage in a project that has been firmly based on research and extensive outreach to stakeholders. Indeed, ACCA has already provided views in response to a 2011 Consultation Paper and a 2012 Invitation to Comment. Our own activities, including roundtables and research, have confirmed the need for change because investors are demanding more informative reporting.

In parallel with the exposure draft, which is open for comment up to 22 November 2013, the IAASB is proposing a field test to enable auditors and companies to experiment and the IAASB to learn whether its standards need further refinement to enhance the usefulness of the auditor’s report.

To get an answer to the question, using the internet as the research tool, it might be foolish to suggest that the IAASB would like every user of audited financial statements on the planet to state their belief and explain why, or why not, the proposals are good:

‘Do users of audited financial statements believe the introduction of a new section in the auditor’s report describing the matters the auditor determined to be of most significance in the audit will enhance the usefulness of the auditor’s report? If not, why?’

You can do that on the IAASB website (you will need to register). If you are an ACCA member or student you can also email your view to us and we will take your views into account when we respond to the consultation. See http://www.accaglobal.com/en/technical-activities/technical-policy/forthcoming-responses.html

A staff-prepared document highlighting considerations that may be of assistance to those who plan to undertake field testing is available on the IAASB website.

board appeal

By John Davies, head of technical, ACCA

Trust is one of the fundamental elements of the landscape in which the professions operate and is seen as one of the key qualities that professionals can bring to the business world.

Clients go to accountants, lawyers and doctors because they want expert, specialist advice that addresses the particular problem they have; they are prepared to pay for that advice because they trust the adviser to give them good advice which best suits their needs. Businesses employ professionals for similar reasons.

Governments for their part realise that the economic and social needs of society benefit from the services provided by professional advisers and have long been prepared to allow the activities of those advisers to be regulated in accordance with professional norms.

Today, we are facing a crisis in this fundamental element of trust. Simply put, politicians and the general public are questioning whether business and the professions can be depended on to run their affairs in the interests of consumers and society in general.

Auditors have been criticised from many quarters for being too close to their clients and for failing, as a result, to act competently and objectively. It has been argued that the rules on fair value accounting, which deal with the way that investments are measured and reported, are framed in a way which gives a misleading picture of the health of the reporting company. Insolvency practitioners are often accused of being complicit in the winding up of businesses that could be saved. And the prevailing economic climate has seen a material increase in the incidence of in-house fraud, and an accompanying concern about how accurately frauds and other forms of financial crime have been reflected in companies’ accounts, with, by consequence, questions about just how ‘true and fair’ some financial statements actually are.

The current concerns actually spread much wider than the professions themselves. The series of collapses in the banking sector in 2008-9 has led to exhaustive re-examinations of how the major banks are run: the UK’s Commission on Banking Standards has concluded, this month, that one issue (among many) that needs in future to be addressed is the process by which individuals are appointed to senior positions in the industry: there needs to be much greater emphasis on ensuring that the individuals in those positions are not only technically competent but can be relied upon to act in a prudent and responsible fashion. The public sector has seen a series of governance-related scandals that have revealed not only gross failures of operational effectiveness but a worrying determination on the part of management to cover them up and to prevent public-spirited individuals from divulging information about them.

This key issue of trust was the centrepiece of the 2013 meeting of the chairs of ACCA’s global forums, the group of expert bodies that advise ACCA on its technical and research work. The meeting considered just how widespread the problem was, how justified the criticisms were, and how the professions might respond so as to re-establish a relationship of trust with clients, employers, governments and wider society.

To help in the discussion of this topic, the meeting heard a presentation from Lawrence Evans, the president of the consultancy firm Edelman-Berland, which produces the Global Trust Barometer, the leading global study of trust and reputation.

Mr Evans drew out a number of key findings from his firm’s latest survey. They confirmed not only that the problem of trust was widespread but that, for all the scandals and the criticisms made of the business world by politicians, people still actually trust business more than they do politicians.

He stressed that the way forward for business was for it to make a strong commitment to transparency. There was a strong correlation, he claimed, between trust and transparency, and the more open and forthcoming businesses were, the greater the likelihood that stakeholder trust would follow. He also reported a strong link between trust in an entity and consumer attitudes towards it – the stronger the degree of trust, the more positive consumer behaviour was likely to be, and vice-versa. Another relevant finding from his survey, one that is encouraging in the context of the issue of trust in the professions, was that people generally placed more trust in the word of subject experts within a business than they do in CEOs.

Mr Evans’ findings suggest that, for all the important problems that the accountancy profession is currently having to wrestle with, accountants are still, potentially, a strong force for good. His contention that transparency offers the way to stakeholder trust is a message that needs to be heeded by businesses of all kinds, in both the private and public sectors, and one which reaffirms the strategic importance of accountancy. Transparency is, after all, what accountancy should be all about – the presentation of information which reveals an accurate picture of the business health of an entity – and a combination of technical competence and a commitment to openness, both qualities that ACCA actively encourages in its members, appears to be the formula which can lead directly to enhanced business effectiveness.