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Issue 2 | February 2016
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At-A-Glance
In this issue, we visit the current
thinking on audit quality in Europe, as
expressed by two recently issued
reports. As our first article
illustrates, the Federation of European
Accountants has continued an ongoing
dialogue that explores how best to
measure audit quality, while also
directing attention to three imperatives
that will shape the future for auditing.
The findings are consistent with results
emerging from similar endeavors by the
Center for Audit Quality in the United
States.
Next, the United Kingdom’s Financial
Reporting Council has assessed the
current state of audit firm quality
controls in the latest of a series of
Thematic Reviews. What proves to be a
strength when performing audits, needs
more work when looking inward at the
audit firms’ own internal processes, as
our second article reports.
Finally, the Sustainability
Accounting Standards Board has rounded
out a series of briefings that assist
with the application of key issues that
are individually unique to a wide array
of industries. Our third article
summarizes the Board’s work, including
an implementation guide that points the
way.
Editor Gerald E. Herter, CPA |
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In This Issue
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Seeking a Sound Future for Europe’s Auditors
European and American audit groups pursue common
quality goals
The Federation of European Accountants (FEE),
based in Brussels, Belgium, represents 50
institutes of professional accountants and
auditors from 37 European countries. As the
mouthpiece of the profession, the FEE is
“committed to inform the European public policy
debate independently. It offers technical
expertise and coordinated views on developments
affecting the European economy. FEE’s
contributions are based on the practical
experience that professional accountants gain
daily in all economic sectors and the values
underpinning the profession’s practice.”
Recognizing the need for the accountancy
profession to take a serious look inward to
consider what changes are needed to succeed in
an increasingly volatile and disruptive
environment, the FEE began a discourse with a
discussion paper in 2014. Building on the
responses to that paper and a conference in
2015, the FEE in January, 2016, published a
follow-up discussion paper titled
Pursuing a strategic debate: The future of audit
and assurance.
The prominent feature throughout the paper
was the importance for maintaining and
communicating audit quality. Though quantifying
indicators of audit quality can be difficult,
responders felt that, by providing measures by
which stakeholders could evaluate audit work
more effectively, audit quality and transparency
would be improved.
Three specific areas singled out for emphasis
were:
- Further improving engagement with
stakeholders;
- Understanding and utilizing new
technologies; and
- Adapting education and training
future auditors for the changing
environment.
While better promotion of current services
was emphasized for SME clients, a variety of
potential additional services was suggested for
larger clients, in the areas of:
- Assurance on forward-looking
information;
- Assurance on non-financial
information;
- Compliance assurance services; and
- Enhanced business reviews.
About a week after the FEE paper was
published, the AICPA’s Center for Audit Quality
(CAQ) issued a report, Audit Quality
Indicators: The Journey and Path Ahead,
summarizing the work the CAQ has been involved
with, which parallels the FEE efforts. Having
started earlier, the CAQ is further along in the
process, having already conducted a pilot study
for companies to experiment using a proposed set
of audit quality indicators set forth in the
CAQ’s Approach to Audit Quality
Indicators, published in April 2014.
The proposed indicators centered around 1) Firm
leadership and tone at the top; 2) Engagement
team knowledge, experience, and workload; 3)
Monitoring; and 4) Auditor reporting.
Introducing the new report with results from
the pilot studies and subsequent roundtables,
CAQ Executive Director Cindy Fornelli stated,
“Our AQI pilot testing and roundtable
discussions have provided enormously helpful
inputs to the profession's work in this area,
and we are grateful to all of the participants.
While validating many aspects of our approach,
these efforts also have showed us where more
work needs to be done.”
The roundtables found that audit committees
were supportive of the process. Even so, they
were also looking for assistance with
qualitative aspects, and noted the importance of
a flexible approach that the audit committee
drives towards attainment of quality financial
reporting, of which the external audit forms one
component. Moreover, the potential for
unintended consequences requires sensitivity
with regard to disclosures, and consideration of
individual engagements and firms within the
overall context of the process.
Summing up, Michele J. Hooper, President and
CEO of The Directors’ Council and CAQ Governing
Board lead on the AQI Initiative, remarked,
“Further dialogue and continued collaboration
among all stakeholders is needed as we develop
AQIs and best practices for their use.”
With the common goals of the FEE and CAQ,
hopefully the collaboration will include the
organizations working together. Judging by the
participation of Chairman James Doty, from the
Public Company Oversight Board in the US, as
keynote speaker for the FEE 2015 conference, and
the holding of one of the CAQ 2015 Roundtables
in London, prospects of joint efforts appear
promising.
For further information, see
FEE pursues the debate on the future of audit
and assurance and
Audit Quality Indicators: Journey and Path
Ahead.
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New Report Targets Quality Controls of UK Audit
Firms
Financial Reporting Council’s Thematic Review
delivers mixed results on monitoring
effectiveness
The Financial Reporting Council (FRC)
is the United Kingdom’s independent regulator
responsible for promoting high quality corporate
governance and reporting to foster investment.
As such, one of the FRC’s charges is to oversee
the audit function of the accountancy
profession, for compliance with FRC standards.
The FRC fulfills this mission through annual
inspections of accounting firms audit practices.
During the past three years, a series of
thematic reviews have been added to supplement
the detailed inspections of specific audits. The
focus on a narrowly defined theme allows for a
more in-depth concentration of an area of
importance than can be attained during the
detailed inspections. Past topics for these
reviews have included the approaches to
materiality, fraud risks, and bank loan loss
provision controls.
The latest installment issued in January,
2016 is titled Audit Quality Thematic
Review: Firms’ audit quality monitoring.
Ironically, the review found that firms were
more effective and applied more resources to
monitoring the quality of audits, than they do
to monitoring the audit firm’s own quality
controls. This result is analogous in a way to
the idea of the old saying “the shoemaker’s
children have no shoes.” The auditors are, in
effect, better at auditing others than they are
at auditing themselves. Of course, that’s the
very reason for the FRC’s work, as well as that
of their American counterpart, the Public
Company Accounting Oversight Board (PCAOB).
Personally, though I consider both of those
functions critically important, I am glad that
the monitoring of client audit quality is the
stronger of the two.
The thematic review covered the monitoring of
quality control systems by nine major audit
firms, including the Big Four. The results
revealed that the FRC found a greater percentage
of audits requiring significant improvement than
the audit firms’ own monitoring systems found.
The FRC strategy over the next three year cycle
is to see that difference minimized, and that at
least 90% of audits reviewed “require no more
than limited improvements.”
The thematic review centered on two areas,
monitoring the firms’ quality control systems
and monitoring completed audits, as summarized
here:
Monitoring the firms’
quality control systems
1. Positives noted
included:
a. Responsible parties
were informed of shortcomings and these were
considered in their personnel evaluations and
compensation;
b. Root cause analyses
were performed on noted issues.
2. Areas needing
attention:
a. Determining that the
depth and timing of monitoring meet the
standards, and that testing samples are
adequate;
b. Assuring that adequate
staffing and training of reviewers is performed.
Monitoring
completed audits
1. Positives noted
included:
a. Less use of checklists
for reviews and a more risk based approach;
b. Inclusion of group
audits with a UK component;
c. Conveying issues for
use in future training and ethics offerings;
d. Use of thematic
reviews to address chronic weaknesses.
2. Areas needing
attention:
a. More robust narrative
of review results
b. Determining whether
issues noted should have been caught during the
audit;
c. Reviews should cover
the latest audit for the selected entities.
d. Audit Committees
should make more use of audit monitoring review
results.
The FRC draft Plan and Budget for 2016/17,
published December 21, 2015, indicates a
continued robust approach to its regulatory
role. An independent effectiveness review of the
FRC in 2015 “concluded that the FRC’s work to
monitor the quality of corporate reporting and
auditing is regarded by stakeholders as a force
for good. Our work has driven substantial
improvements in the quality of reporting and
audit, and is seen as a benchmark by regulators
in other jurisdictions.” As a result of the
review, the FRC intends to enhance investor
involvement, promote continuous audit and
reporting standards improvement, upgrade
technical expertise, promote greater
transparency, and implement new stakeholder
communication measures. Future thematic reviews
planned include “firms’ quality review
processes, the use of data analytics on audits,
and firms’ root cause analysis of the findings
from internal and external monitoring.”
For further information, see
Review of audit firms’ quality monitoring to
boost confidence in audit.
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Quantifying Sustainability
Sustainability Accounting Standards Board issues
new guide and industry specific measures
Since its founding in 2011, the
Sustainability Standards Board (SASB) has been
busy developing standards that deal with the
non-financial risks and opportunities that
traditional financial reports have been unable
to address. For entities to survive and prosper
into the future, planning for these factors can
be crucial and at times even more important then
financial issues.
An indication of the strategic prominence of
sustainability issues can be drawn from the
membership on the Board of Directors. Included
among the eighteen industrial and professional
leaders on the Board are Robert Herz, former
chairman of the Financial Accounting Standards
Board, Mary Shapiro and Elisse Walter, both
former Chairs of the US Securities and Exchange
Commission, and former New York City Mayor
Michael Bloomberg, who serves as the SASB
Chairman. Deloitte recently donated a million
dollars for the SASB’s work and “more than 2,800
individuals affiliated with $23.4 trillion in
assets under management and $11 trillion market
capitalization participated in multi-stakeholder
industry working groups informing standards
development.”
Recognizing the challenges involved in
creating useful, material and measurable
non-financial standards, SASB participants have
worked meticulously in 79 different industries
within eleven sectors, developing metrics that
can provide accountability for the key areas of
risk and opportunity for each distinct industry.
The eleven sectors are consumption I,
consumption II, financials, health care,
infrastructure, renewable resources &
alternative energy, resource transformation,
services, technology & communication,
transportation, and non-renewable resources.
Standards for ten of the sectors are complete
and issued, covering 71 industries. For the
final sector, infrastructure, an exposure draft
is out for comment, covering the remaining eight
industries: electric utilities, gas utilities,
water utilities, waste management, engineering &
construction services, home builders, real
estate owners, developers & investment trusts,
and real estate services.
Industry Briefs are available that summarize
each industry, enumerate the key material risk
areas, and describe the metrics for measurement.
Additionally, in December, 2015, the SASB
published The SASB Implementation Guide for
Companies. This guide will assist users to “1)
identify the industry-specific sustainability
topics most likely to be material to an
investor, 2) understand the current state of
disclosure and performance on those topics, and
3) enhance existing reporting processes to more
effectively disclose material information on
sustainability topics.”
Affirming these objectives, Jean Rogers,
Founder and CEO of SASB stated that by following
the Guide, “This will ensure companies
effectively disclose investor grade information
on material sustainability factors to the
capital markets, thereby reducing the need to
respond to multiple investor questionnaires."
Addressing accounting professionals, Robert
Herz added that "Financial reporting
professionals have the unique opportunity to
help their companies provide the information
that investors want and markets need. The
Implementation Guide offers reporting
professionals practical guidance on using and
implementing SASB standards in SEC filings."
SASB is also establishing the Advisory
Partners group for consultants and corporate
advisors, to assist companies with all aspects
of the implementation process for the standards.
For further information, see
SASB Issues Guidance on Using SASB Standards.
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Audit & Accounting Alert
is a publication of Integra International intended
to highlight emerging issues in the profession.
The goal is to give Integra members an awareness
of developments impacting the practice of Audit &
Accounting, enabling them to stay on the forefront
of industry trends.
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Editor Gerald E. Herter •
HMWC CPAs & Business Advisors, 17501 E. 17th
Street, Suite 100, Tustin, CA 92780-7924
• Tel: 1 714 505-9000 • Fax: 1 714 505-9200 •
Email:
[email protected]
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