Archives For Audit

By Sue Almond, technical director, ACCA



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 …


Bringing down the barriers to shareholders subjecting company management to frank and public questioning at the annual general meeting will take more than a beefed up auditor’s report, says Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank


‘The first resolution of this AGM will be related to the receipt and consideration of the company’s accounts and the reports of the directors and the auditors.’

So there it is, the number one item at the annual general meeting of a typical quoted company. Cue a well-informed debate between investors who have studied all x hundred pages of the annual report, the directors who produced it and the auditors who scrutinised their work. Dream on.

In the real world the only contentious issue is likely to be directors’ pay. One audit partner told me that in many years of attending annual meetings he was asked only one question: ‘Is the audit partner here?’ The answer was ‘yes’ and that was it. A key point of initiatives to beef up the auditor’s report is that it will provide ‘hooks’ for a dialogue between the company and its shareholders, and even (whisper it softly) between the auditor and the shareholders.

So will it lead to a shareholder spring of protests at AGMs along the lines of those seen over pay? Maybe, eventually, but there are several barriers. Sadly, it is a romantic notion that the AGM is a forum for frank public debate on fundamental issues between a company’s owners and their managing agents. As the Kay Review of UK equity markets pointed out, ownership is very fragmented. More than 40% of the market is attributed to non-UK holders; UK pension funds and insurers hold only about 20%, individuals 11%.

But even for those based in the UK, the diversity of their portfolios and the concentration of AGMs into a March-June season make it physically impossible for most shareholders to attend; hence, the reliance on proxy voting agencies. An awkward question may be asked by an individual, but the risk is high that this tiny stakeholder will be fobbed off. It does help, however, if something specific in the audit committee’s report – and, in future, the auditor’s commentary – can be pointed to.

Another issue is the passage time between the preliminary announcement, the publication of annual report and the AGM. At present the most incisive bout of public questioning comes via the company’s webcast presentations to analysts on the day of the announcement. But two problems remain: the prelims do not have all the notes; and even when the annual report is published at the same time (hats off to HSBC), no one has time to study the information properly before the meeting.

The best opportunities to question management are afforded to big institutional investors, the ones the management wants to see, in one-to-one meetings in the days after the preliminary announcement. They should not get any new price-sensitive information, but such access is highly prized. The FT reported that some asset managers were paying brokers $20,000 an hour to meet CEOs. Better reporting by audit committees and auditors cannot improve the dialogue by itself. More opportunities need to be provided to pose the prompted questions – preferably in public via webcasts, and definitely not in paid-for privacy.

This process should start after publication of the annual report and run for some weeks, taking in the AGM. Questions could be emailed in advance to the audit committee chairman and the audit partner – some could be dealt with via a dynamic frequently asked questions page. The meeting itself should be asked to approve – not just receive – the financial and audit reports. Anything that aids a considered approach to a company’s accounts and prompts auditor independence should benefit the company, its long-term shareholders and market efficiency. That would be green shoots indeed.

This article first appeared in Accounting and Business, UK edition, April 2013

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 David York, head of auditing practice at ACCA

The Higgs Boson is no doubt feeling rather exposed right now, which probably makes a change from feeling hunted. Even the Financial Times has gotten excited about the discovery.

The news recently has been full of the discovery of what some have dubbed ‘the god particle’, a fundamental building block of the universe that gives other particles their mass. Actually it is a bit more complicated than that – trust me I’m a physicist – or at least I have a degree in physics which is a starter. You will see from the job title that these days I am more of an auditing expert, so what is the connection?

When I joined the accountancy profession straight after university I was surprised to find that accountants were better experimenters than the scientists. A scientist reports the results of an experiment, plus or minus the margin of error, but an accountant can estimate the value of work in progress to the nearest pound. That is why financial statements balance – but in reality it’s all a bit of smoke and mirrors.

Auditors are also in an envious position in comparison to scientists because they can form a judgement, and report only that ‘in our opinion the financial statements give a true and fair view’. The auditor’s smoke and mirrors are hidden elsewhere in the report where readers are told that the evidence the auditor bases the opinion on is sufficient to ‘give reasonable assurance’. Actually it is a bit more complicated than that – trust me I’m an auditor.

In fact, it’s so complicated you would probably find the standard model of particle physics easier. To make a start on that you could do worse than the BBC's Q&As about the Higgs Boson

But one thing in all the news coming out of the Large Hadron Collider (the Cern Giant) that I found strange yet charming was the life breathed into Sigma – a Greek letter that has unfortunately never been as popular as Alpha and Omega. The physicists analysing the results applied a test of statistical significance call 5-sigma – and achieved instant popularity because it would have been less catchy to have to refer to five standard deviations; although that itself might make a boson blush.

5-sigma means that there is a 99.99994% chance the results are right. Which seems pretty certain, although perhaps only what we should consider necessary for something so important. 

So what about audit opinions? They are important too – just ask yourself how much the global capital markets moved on the announcement of the Higgs Boson discovery! Well as I said such things are complicated. But think 2-sigma (95.5%) or 3-sigma (99.73%) as a maximum – not quite the certainty the Higgs Boson has required.

Who has it right? You choose.

The waiting game

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By John Davies, head of technical, ACCA

The content of last night’s Lords debate shouldn’t really come as a surprise to anyone who’s been following the audit debate in the UK closely: the Lords’ Economic Affairs Committee members stuck to their positions and the minister stuck to the Government’s position. The Lords might be concerned that the Government haven’t fully supported their criticisms of the UK’s audit market, but really the Government has steered a very reasonable course.

The Government may have been more cautious than the lords on the dialogue between auditors and regulators, and they have disagreed with the lords over International Financial Reporting Standards (IFRS), but it can hardly be accused of sitting on the fence or not taking the issue seriously when it has referred the audit market to the Office of Fair Trading, which has consequently passed the matter to the Competition Commission.

We agree with the government that IFRS did not encourage or result in a loss of prudence in accounting before the financial crisis, and we support the government’s position that there shouldn’t be a ban on the provision of non-audit services to clients by their auditors. We don’t agree with the government or lords’ position that there should be a further reduction in the audit requirement for small businesses. We would urge the Government to reserve the right to legislate to achieve greater auditor-regulator dialogue, something the department of Business, Innovation, and Skills wasn’t keen on in their original response to the lords’ report.

The problem here though, and the problem for the audit debate in the UK, is that action all depends on what happens in Brussels. The proposals from Brussels are far from finalised and the Government has wisely decided that waiting for a final decision from Brussels before making its own move is the best course of action.

ACCA has been fully engaged with the audit debate at both UK and EU level and will continue to make the case that audit is key to both re-establishing trust and market confidence and to contributing to investor protection because it provides easily accessible, cost-effective and trustworthy information about the financial statements of companies.