The consultation had been launched in August 2014 to examine whether the adoption of IFRS improved the efficiency of EU capital markets by increasing the transparency and comparability of financial statements.

Access to the responses received is available here. The European Commission is expecting to publish a summary results of the consultation soon.

The FRC’s thematic reviews analyse further aspects of auditing which are not considered in detail during routine audit inspections of individual firms.  Thematic reviews seek to “identify both good practice and areas of common weakness” among audit firms.  The FRC announced in December 2013 that it would conduct a thematic review of bank and building society audits concentrating specifically on loan loss provisions and general IT controls.

The FRC’s Audit Quality Review team visited seven of the UK’s largest audit firms to review their audit methodology, guidance and training in respect of the audit of loan loss provisions and related IT controls. They also reviewed relevant aspects of the audit procedures performed on 13 individual audits during those visits, covering a range of banks and building societies.

During its review, the FRC identified a number of “good practice observations” which audit firms should continue:

• successful integration of IT specialists into the audit team;
• use of recently developed testing techniques such as benchmarking and data analytics, and adoption of more sophisticated techniques such as code reviews, which enabled the audit teams to carry out a more rigorous analysis of management’s data extraction and manipulation for statistical purposes;
• use of centrally developed templates to consider completeness and accuracy of data and to improve consistency in the assessment of loan loss provisions and valuation of more complex collateral held;
• increased use of other experts such as valuations experts; and
• provision of sector-specific training and implementation of sector-specific audit methodologies.

However, alongside these good practices there were also a number of areas where improvements are required. The report provides a number of key messages for auditors and audit committees to address these areas for improvement.

Key messages for auditors:

Be proactive in monitoring and enhancing bank audit quality, as well as being reactive to regulatory concerns. Ensure that bank audit initiatives and procedures remain fit for purpose and enhance them where significant issues are identified.

Revisit procedures to ensure that all regulatory and market risks are captured by risk assessment methodology and sector training and consider or enhance the use of benchmarking and data analytics as effective audit tools in the audit of loan loss provisions.

Ensure audit teams apply an appropriate degree of challenge and professional scepticism in the audit of loan loss provisions, rather than seeking to corroborate management’s views.

Make sector training mandatory for partners and staff engaged in bank audits where this is not already the case and monitor attendance at, and effectiveness of, those training courses.

Fast track the integration of non-IT specialists into the audit team using lessons learned in integrating IT specialists into audit teams.

Perform root cause analysis to understand why current quality control processes did not identify weaknesses highlighted by the review.

Key messages for audit committees:   

Discuss with auditors their proposed actions in response to this thematic review.

Understand the implications of the firm’s benchmarking and other data analytics on the quality and robustness of the audit of the financial statements.

Seek assurance annually that the sector expertise and competence levels of the audit team and the firm are appropriate in relation to the bank’s business activities.

Consider with the auditors the effectiveness of the bank’s relevant internal controls, and the extent to which the auditors review them and are able to place reliance on them.

Ensure management is assessing the impact of current and emerging issues on a timely basis and that the auditor and the bank jointly understand how these issues affect the assessment of significant risk.

Consider the timing of planning with group auditors and check it is sufficiently early in the process to obtain appropriate and relevant information from group or other component auditors.

The FRC concluded that “…there has been an increase in the quality of the audit of loan loss provisions and related IT controls in banks. In particular, improvements have been noted where significant issues have been raised previously. However we identified certain instances where audit teams were still not appropriately challenging in their audit testing…[W]hilst significant investment in sector specific audit procedures has been made by firms in response to our previous inspections, we consider that auditors need to be more proactive in ensuring that their procedures across all areas are fit for purpose, rather than implementing changes primarily in response to regulatory findings.”

This thematic review follows the thematic reviews of auditors' materiality judgements and the auditor’s identification of and response to fraud risks and the auditor’s consideration of laws and regulation.

The press release and full report can be obtained from the FRC website.

At the heart of the programme is statement of shared beliefs, signed by all participants, that:

• highlights the importance of high quality, transparent reporting for building trust in the capital markets and for making investment decisions;
• publicly reaffirms the IASB's commitment to continue to seek and consider investor views in the development of new accounting standards; and
• documents the investors community's commitment to the development of high quality financial reporting standards by working with the IASB to ensure that the investor perspective is articulated clearly and is considered in the standard-setting process.

As part of the programme, the investment firms commit to an ongoing dialogue, executive level support of the programme and access to analysts and portfolio managers. In return, the IASB has committed to providing an improved channel through which to influence standard development, developing investor-tailored webcasts, providing investor-friendly articles on proposed changes, providing access to IASB members and staff, and providing investor-focused education sessions.

Please click for more information on the new programme on the IASB's website.

Mr Hoogervorst stated:

As you know, the Commission is currently evaluating the impact of IFRS in the EU. We do not expect this evaluation to say that IFRS is perfect, because we know it is not. Still, we feel pretty confident that the verdict will be that, overall, IFRS has had a positive impact on the European economy.

The IASB Chairman also discussed some potential 'critical remarks' that the Commission's report may contain and noted that the IASB will take the feedback constructively:

We acknowledge financial statements may have become too long. We are reviewing our disclosure requirements to reduce the overload of boilerplate disclosures. We understand the concerns of investors who fear unwarranted profit taking on the basis of flimsy valuations. In our new Conceptual Framework for Financial Reporting, we will make clear that prudence should be exercised to prevent overstatement of assets and profits. We are also against understatement of liabilities, which is why lease commitments need to brought to the balance sheet.

The ITG was created to keep the IASB informed on issues occurring during implementation of the new impairment requirements in IFRS 9 Financial Instruments, to assist in determining what action may be needed to resolve diversity in practice and to provide a public forum for stakeholders to learn about the new impairment requirements from others involved with implementation. The first face-to-face meeting of the group was planned for the last quarter in 2014. However, the agenda papers for the conference call state: "We have yet to receive many substantive technical implementation issues on the impairment requirements of IFRS 9 that meet the submission criteria." Therefore, the first physical meeting will be replaced by a conference call to discuss operating procedures and the status of implementation. Please click for access to a detailed agenda and the agenda papers for the call on the IASB website.

The Effects Analysis Consultative Group (EACG) was established in 2013 to provide independent advice to the IASB on how it should consider the effects of changes it develops to its financial reporting requirements (IFRS). Membership of the EACG includes representatives from a geographically and professionally diverse group of stakeholders.

The report that has now been presented to the Trustees and that is also publicly available is intended to support the IASB in further embedding effects analyses within its due process, with the objective of strengthening the standard-setting process.

The EACG’s report identified a series of recommendations among which are the following:

The IASB should assess and explain how general purpose financial reports are likely to change because of new requirements, and why those changes will improve the quality of general purpose financial reports. Furthermore, the IASB should explain why it considers those changes to be justifiable, demonstrating how it assessed the likely effects on the direct costs to preparers of meeting the new requirements and the related costs to users.

The IASB should work co-operatively with local standard-setters so that it can plan its fieldwork and outreach to see whether there are opportunities to organise fieldwork in ways that are mutually beneficial for the IASB and those local jurisdictions.

The IASB should plan its fieldwork so that it is proportionate to the changes in financial reporting being proposed. A more pervasive or significant potential change would normally warrant a more comprehensive assessment programme. The type, and depth, of fieldwork undertaken should also reflect the stage of development of the project.

The IASB should aim to undertake consultation that is geographically broad-based so that its Standards are written with principles that can be applied globally. Other accounting standard-setters can help by providing the IASB with analysis and information about factors and possible effects that might be unique to their jurisdiction.

The IASB should make available information about the nature of fieldwork and outreach that it has undertaken. This information should be made available throughout the development of the project.

The format of the analysis of the likely effects of a proposed change in financial reporting should reflect the stage of the proposals. When a new Standard is issued, the IASB should generally prepare a separate Effects Analysis Report.

The full EACG report as well as the press release are available on the IASB's website.

Overall we support the proposals. Our key comments are as follows:

• we believe that, since compliance with UK accounting standards is generally accepted as being necessary to give a true and fair view, the role of UK accounting standards will be significant under the new regime in guiding directors of small companies as to whether further disclosures may be necessary, in addition to those mandated by law, in order to present true and fair accounts;
• we agree that a new accounting standard for micro-entities should be developed;
• we agree that the FRSSE should be withdrawn and that small entities (other than micro-entities) should be brought within the scope of FRS 102;
• we strongly support the provision of increased flexibility in the layout of primary statements, particularly to accommodate the application of IFRS layouts and terminology for companies adopting FRS 101; and
• we recommend that the Financial Reporting Council (FRC) work closely with the Department for Business, Innovation and Skills (BIS) to make the new regime available to companies as soon as possible, including permitting early adoption.

• Our response to the consultation
• Our previous news story on the consultation

Click through for direct access to the notes:

Wednesday, 19 November 2014

• Conceptual Framework
  • Sweep issues
  • Update on the conceptual framework projects of the FASB and IPSASB
  • Measurement – transaction costs.

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

The key areas suggested where BIS believes corporate directors may continue to be allowed are:

• UK companies with shares admitted to trading on regulated markets (e.g the main market of the London Stock Exchange) or prescribed markets (like AIM), on the grounds they are already subject to significant transparency requirements.
• Large public (PLC) and private (limited) companies in group structures, where BIS believe the case is more finely balanced. A supplementary question asks if the exemption should only be available if all of the directors of any corporate director are themselves natural persons.
• Companies subject to sectoral regulation including charitable companies, trustee companies of pension funds and open ended investment companies.
• Societas Europaea and Limited Liability Partnerships.

BIS is of the view that a corporation sole should continue to be able to act as a director. An example of a corporation sole would be “The Secretary of State for Business, Innovation and Skills” rather than the named holder of that office at any particular time.

The ban on corporate directors is contained in the Small Business, Employment and Enterprise Bill which is currently before Parliament. The Bill provides that the Secretary of State may make regulations exempting certain companies from the ban.

The deadline for comments is 8 January 2015.

Click for:

• The full consultation (link to the BIS website).
• Our previous UK Accounting Plus news item on the Small Business, Employment and Enterprise Bill.