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Audit & Accounting Alert Newsletter

Issue 2 | February 2016

At-A-Glance

Gerry Herter

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

In This Issue 

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:

  1.  Further improving engagement with stakeholders;
  2.  Understanding and utilizing new technologies; and
  3.  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:

  1.  Assurance on forward-looking information;
  2.  Assurance on non-financial information;
  3.  Compliance assurance services; and
  4.  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.


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.


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.

 

Additional A&A News

The following links provide a selection of current articles devoted to highlighting other A&A topics currently making news.

  1. New Lease Standards May Demand Two Sets of Books
  2. Is bitcoin broken? Prominent developer cashes out
  3. Accounting For Legitimacy
  4. Accounting Rule That Made Weak Banks Look Healthier Ended
  5. Three Reasons to Learn More about Audit Analytics
  6. IAASB Revises Standard for Auditing Special Purpose Financial Statements

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.

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: gerry@hmwccpa.com