At-A-Glance

Pursuing Audit Accountability

New measures address audit quality, fraud and transparency

Regulators around the world continue to seek effective solutions to address the continued instances of corporate collapse, fraud, substandard audit performance, and inadequate transparency that threaten the credibility of financial reporting. In addition to American and German efforts, the Audit & Accounting Alert has reported in the past two years on three studies that authorities in the United Kingdom have conducted: 1) Kingman review of the Financial Reporting Council (FRC) (March 2019 issue), 2) Competition and Markets Authority (CMA) study of the statutory audit services market (November 2019 issue), and 3) the Brydon review of the quality and effectiveness of audit (March 2020 issue).  Now the UK’s Department for Business, Energy & Industrial Strategy (BEIS) has on March 18, 2021, issued a comprehensive, 230-page consultation paper, Restoring trust in audit and corporate governance, proposing measures to be taken in response to the studies.

The BEIS agreed with the findings of the three studies, as summarized in the paper:

Directors

1. Issue an Audit & Assurance Policy describing the approach to seeking internal and external assurance of
2. reports to shareholders
3. Conduct an annual internal control review, and report on the effectiveness of controls.
4. Report on steps taken to prevent and detect material fraud.
5. Issue an Annual Resilience Statement assessing company prospects and challenges.
6. Attest that company dividend amounts are within the limits of distributable reserves and not likely to cause insolvency.

1. Describe in the audit report, the work performed to understand internal control for purposes of the audit and
2. the impact on the audit.
3. Provide an opinion on the directors’ report on internal control effectiveness.
4. Report on accuracy of directors’ actions to prevent and detect material fraud.
5. Amend the auditing standard on fraud “to make clear that it is the obligation of an auditor to endeavour to detect
6. material fraud in all reasonable ways.”
7. Report on steps taken by auditors to detect any material fraud and assess effectiveness of controls.
8. Require auditors to broaden the range of information considered for making audit judgments.
9. Establish a new independent corporate auditing profession.
10. Require the operational separation between audit and non-audit functions of firms.
11. Establish new overarching audit principles.

1. Propose a framework for the new Audit, Reporting and Governance Authority (ARGA).
2. Give ARGA new or added powers to:
3. Increase competition through a managed share audit approach, where the firm leading a group audit would be required to use a smaller audit firm for a part of entities within the group.

1. Give power to propose added matters of emphasis for an audit.
2. Provide for better communication to shareholders after a change of auditor.

The BEIS has asked for comments by July 8, 2021. While these proposals are specifically directed at the UK, the issues addressed can provide useful dialogue for other jurisdictions. Some provisions have been dealt with elsewhere, such as by the Sarbanes-Oxley of 2002 in the United States, following the Enron and other scandals. Evaluating the successes and shortcomings of that legislation may prove beneficial in the analysis of these new proposals. The cost alone of the wide sweeping recommendations will undoubtedly bring on broad debate. Also, the pros and cons of separating the consulting function from a firm’s audit function has been a hot topic. However, at least in the UK, the largest accounting firms are already taking steps anticipating that requirement. Finally, the question remains as to whether the new measures will do enough to lessen the impact of the built-in conflict of interest, whereby a company hires and pays its “independent” audit firm.  

Further details can be found at Restoring trust in audit and corporate governance.
(Restoring trust in audit and corporate governance - GOV.UK (www.gov.uk).

COVID-19 Related

International

IASB – International Accounting Standards Board ( www.ifrs.org)

1. Coronavirus Information and resources – link –
   https://www.ifrs.org/news-and-events/2020/03/the-coronavirus-and-the-foundations-work/
2. Covid-19-Related Rent Concessions beyond 30 June 2021 (amendment to IFRS 16), issued March 31, 2021, extends the relief to cover rent concessions that reduce only lease payments due on or before 30 June 2022. Effective for annual reporting periods beginning on or after April 1, 2021.

IFAC – International Federation of Accountants (www.ifac.org)

1. COVID-19 Resources from IFAC's Network – link -
   https://www.ifac.org/knowledge-gateway/series/COVID-19-resources-ifacs-network

ACCA – Association of Chartered Certified Accountants (www.accaglobal.com/)

1. Coronavirus Information and resources – link -
   https://www.accaglobal.com/us/en/cam/coronavirus.html

CIMA – Chartered Institute of Management Accountants (www.cimaglobal.com)

1. Update on the Coronavirus and Impact for Association Activities – link -
   https://www.cimaglobal.com/Members/Update-on-Coronavirus/

IIRC - International Integrated Reporting Council (www.theiirc.org)

1. No new developments

World Economic Forum – (www.weforum.org)

1. The COVID Action Platform – link - https://www.weforum.org/platforms/covid-action-platform - focuses on three priorities: 1. Galvanize the global business community for collective action. 2. Protect people’s livelihoods and facilitate business continuity. 3. Mobilize cooperation and business support for the COVID-19 response

Africa, Europe, India, and the Middle East (AEIME)

1. FRC guidance for companies and auditors during COVID-19 crisis – link - https://www.frc.org.uk/covid-19-guidance-and-advice.

1. Coronavirus – updates – link - https://www.icaew.com/insights/coronavirus.

1. No new developments

Americas, Asia, Australia and New Zealand (AAANZ)

1. AICPA Coronavirus (COVID-19) Resource Center – link - https://www.aicpa.org/news/aicpa-coronavirus-resource-center.html

1. FASB Response to COVID-19 – link - https://www.fasb.org/COVID19

1. GASB Response to COVID-19 – link - https://www.gasb.org/COVID19

• No new developments

1. PCAOB Response to COVID-19 – link - https://pcaobus.org/Pages/response-to-COVID-19.aspx

1. No new developments

1. SEC Coronavirus (COVID-19) Response – link - https://www.sec.gov/sec-coronavirus-COVID-19-response CAANZ - Chartered Accountants Australia and New Zealand (https://www.charteredaccountantsanz.com/)
2. Financial Reporting and Audit Guide: Financial reporting and audit issues stemming from COVID-19 – link - https://www.charteredaccountantsanz.com/tools-and-resources/client-service-essentials/reporting/financial-reporting-and-audit-guide-financial-reporting-and-audit-issues-stemming-from-covid19

Other Updates

1. Exposure Draft - Disclosure Requirements in IFRS Standards—A Pilot Approach Proposed amendments to IFRS 13 and IAS 19, issued March 21, 2021, intending to “enable companies to enhance their judgement and reduce ‘boilerplate’ information, giving investors more useful information.” Comment period ends October 21, 2021.

1. No new developments

1. No new developments

1. No new developments

1. International Framework 2013/2021 comparison, document released March 11, 2021, “to enable readers to clearly identify the changes that have been made to the 2021 <IR> Framework.”

1. No new developments

Africa, Europe, India, and the Middle East (AEIME)

1. Our Approach to Audit Supervision, report published March 25, 2021, “serves two purposes. First, to aid accountability by describing what we seek to achieve by audit supervision and how we intend to achieve it. Second, to communicate to the firms performing statutory audits of public interest entities what we expect of them, in both requirements and practices and what they can expect from us in the course of supervision.”

1. Developing a meaningful Audit and Assurance Policy - A Policy for Progress, report published March 22, 2021, sets out “key recommendations for companies to develop a meaningful audit and assurance policy that helps better inform their stakeholders.”

1. Proposals for a relevant and dynamic EU sustainability reporting standard-setting, report published March 8, 2021, “proposes a roadmap for the development of a comprehensive set of EU sustainability reporting standards.”

Americas, Asia, Australia and New Zealand (AAANZ)

1. No new developments.

1. Intangibles—Goodwill and Other - Accounting Alternative for Evaluating Triggering Events – ASU  2021- 03, issued March 30, 2021, “allows private companies and not-for-profit organizations to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, as of the end of the reporting period, whether the reporting period is an interim or annual period.  It eliminates the requirement for companies and organizations that elect this alternative to perform this assessment during the reporting period, limiting it to the reporting date only.” Effective prospectively, generally beginning in 2020.

1. No new developments

1. No new developments

1. No new developments

1. No new developments

1. Exposure Draft - Interim Final Amendments – issued March 24, 2021, pursuant to submission and disclosure requirements of the Holding Foreign Companies Accountable Act (HFCA Act), for an “audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the Public Company Accounting Oversight Board (PCAOB) has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction,” will require the “registrant to submit documentation to the Commission establishing that the registrant is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant.” The interim final amendments become effective 30 days after publication in the Federal Register and comments on the amendments are due by the same date.

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