AT-A-GLANCE
A core basis for the existence of audit regulators around the world is to assure that auditor performance aligns with the expectations of stakeholders, who depend on the credibility of audited financial statements. Faith in those regulators has come under severe testing in the first two decades of the 21stcentury. Audit failures revealed in the collapse of major corporate behemoths has given rise to intense calls for regulator reform.
In the American arena, the jolt came early in the century’s first decade, with the Enron debacle leading a cycle of auditor malfeasance. The United States responded with the formation of the Public Company Accounting Oversight Board (PCAOB). With almost two decades under its belt, the PCAOB has matured into a powerful watchdog, as well as a resource for audit guidance, as the article in this issue reports.
More recently, the United Kingdom has been reeling from the collapse of Carillion plc, a major corporate enterprise. Again, the financial audits have come under attack, and with them the regulator, the Financial Reporting Council (FRC). Acknowledging flaws in the authority of this agency, as well as questionable effectiveness, the government has called for replacement of the FRC with a stronger, more empowered regulator, which the article in this issue highlights.
Finally, our Worldwide Update covers news from organizations across the globe.
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CORPORATE AND AUDIT FAILURES LEAD CALL FOR NEW BRITISH REGULATOR
Audit watchdog with more muscle to replace beleaguered Financial Reporting Council
The last issue of the Audit & Accounting Alert reported on the innovative, forward looking approach of the United Kingdom’s Financial Reporting Council (FRC) in tackling the challenges of financial reporting in the age of artificial intelligence. Unfortunately, the auditor watchdog role of the FRC has not fared as well in keeping pace with the rapid changes in the accounting and reporting complexities of organizations subject to its oversight.
With collapses like that of Carillion plc, the second largest construction company in the United Kingdom, in early 2018, and severe criticism of the company’s audits performed by KPMG, the government commissioned an independent review of the FRC (known as the Kingman Review) to determine what went wrong, and the appropriate actions to take. Among the 83 recommendations from the review was a call to replace the FRC with a totally new, more powerful body.
The review characterized the FRC as “an institution constructed in a different era – a rather ramshackle house, cobbled together with all sorts of extensions over time. The house is – just – serviceable, up to a point, but it leaks and creaks, sometimes badly. The inhabitants of the house have sought to patch and mend. But in the end, the house is built on weak foundations.” To be fair, the FRC never had the needed authority to carry the clout that was necessary to be fully effective.
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PCAOB IMPLEMENTS NEW DIRECTIONS ON AUDIT OVERSIGHT
Outlook for inspections and new audit report content put in place
When the PCAOB issued the Inspections Outlook for 2019in December, the term “transformation,” a word more often found in religious contexts, was used to describe the wide sweeping reassessment of the approaches for planning, conducting and reporting on the Board’s periodic examinations of audits and auditors. While some of the anticipated results will address longer range aspects, a number are to be implemented in 2019.
Following up, on March 14, 2019, the Staff Inspections Outlook for Audit Committees (Outlook) was published, spelling out the Board’s more robust intent for engagement with audit committees, along with delineation of key areas of inspection focus, as well as suggested questions audit committees may want to ask the auditors during the year. The information will be useful for all auditors in considering where attention may be important to place in their own firms.
The key areas of focus for 2019 are:
1. Technological developments
2. Audit firms’ actions addressing past inspection findings
3. Audit procedures on new accounting standards
4. Audit firms’ use of Audit Quality Indicators (AQIs)
5. Implementation of the new auditor’s reporting model requirements
6. Audit firms’ systems of quality control
7. Auditor independence
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Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.
INTERNATIONAL
IASB
International Accounting Standards Board (www.ifrs.org)
- IFRS for SMEs Modules, published March 5, 2019, is a series of 35 modules developed over the past couple years to assist those interested in “learning about, applying, or reading financial statements prepared using, the IFRS for SMEs Standard. Included with each module are sections covering requirements, significant estimates and other judgments, comparison with full IFRS Standards, test your knowledge and apply your knowledge.
IFAC
International Federation of Accountants (www.ifac.org)
- International Accounting Education Standards Board (IAESB)- Exposure Draft, Proposed Revisions to Part 4B of the Code to Reflect Terms and Concepts Used in ISAE 3000 (Revised), issued March 27, 2019, proposes “changes in key terminology, including a revised definition of the term “assurance client”; enhanced and clarified independence requirements for attestation engagements; clarification of the types of assurance engagement addressed in Part 4B; simplified guidance on assurance engagements that refers to the definitive source of explanatory material on such engagements in IAASB literature.” The comment period ends June 26, 2019.
ACCA
Association of Chartered Certified Accountants (www.accaglobal.com)
- The capitalisation debate: R&D expenditure, disclosure content and quantity, and stakeholder views, research report jointly published by ACCA and Deloitte on March 19, 2019, “looks at the extent to which companies using IFRS recognize development costs as assets in different countries and in different sectors. It investigates the factors that may lie behind that asset recognition and makes some suggestions as to how reporting of R&D might be improved.”
- Machine learning: more science than fiction, research report published April 10, 2019, “focuses on machine learning, which is the ability of computers to ‘learn’ and make decisions or predictions based on analysis of large sets of data.” Along with the substantial opportunities from the technology, the report presents the ethical challenges that need to be considered as well.
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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.This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors forspecific advice.
Editor Gerald E. Herter ~ HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin CA
email: [email protected]
Integra International is registered in London at 1st Floor Sackville House, 143-149 Fenchurch Street, London, EC3M 6BN, United Kingdom
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