IFIAR comprises 50 independent audit regulators from jurisdictions in Africa, the Americas, Asia, Europe, the Middle East and Oceania.  IFIAR provides a forum for regulators to share knowledge of the audit market and share the practical experience gained from their independent audit regulatory activity.   The Financial Reporting Council (FRC) is a member. 

The report summarises the key inspection findings from the audits of listed public interest entities (including systematically important financial institutions) and firm systems of quality control submitted by 36 of IFIAR’s members.  Findings were submitted from the most recent audit inspection reports of members that ended by June 2016. 

The report identifies that in the area of firm-wide systems of quality control there was a “general trend of decreased rates of findings”.  However the report indicates that “too many audit firms continue to have high rates of inspection findings” and that “more improvement is required”.  The quality control elements with the highest rates of inspection findings include engagement performance, independence and ethical requirements, human resources and monitoring. 

With regards to inspections of individual audit engagements, the report highlights that “inspected audits of listed public interest entities with at least one finding remained unacceptably high at 42%”.  Frequent findings were in the areas of:

• Accounting estimates, including fair value measurement.
• Internal control testing.
• Audit sampling.
• Revenue recognition. 

The report also identifies that 49 per-cent of the systematically important financial institutions audits inspected had at least one finding.  Frequent findings were in the areas of:

• Use of experts and specialists.
• Internal controls testing.
• Audit of insurance contract liabilities. 

In 2015, IFIAR and the six largest network firms agreed on an initiative to improve audit quality globally by reducing the number of deficient audits (those with at least one finding) reported by its members by at least 25 per-cent by 2019.  IFIAR has indicated that it will provide an update on progress on this measure within its 2018 report. 

In May 2016 the Financial Reporting Council (FRC) published its own report of audit quality inspection work carried out by its Audit Quality Review (AQR) team.  Additionally in September 2016 the FRC published a thematic review of root cause analysis performed by audit firms relating to audit inspection findings and in March 2017 it published the results of its thematic review in respect of firms’ audit quality control procedures and other audit quality initiatives. 

Click for (all links to IFIAR website):

• Stakeholders announcement
• IFIAR report ‘International Forum of Independent Audit Regulators – Report on 2016 survey of inspection findings’

There are eight topics on the agenda.

Tuesday 21 March

The IASB will consider corporate reporting more broadly. Until now the IASB has been monitoring developments in corporate reporting, including integrated reporting, sustainability and the recent work on climate-related disclosures, and cooperating with other bodies. The staff recommendation is that the IASB take a more active role in thinking about broader corporate reporting issues. As a first step, the IASB should look to review and update its Practice Statement on Management Commentary.

The IASB has a brief session to review its work on goodwill and impairment, primarily for information and planning purposes.

The IASB will review its work on discount rates, one of its research projects. The staff are recommending that the project be closed, with no further work required other than to ensure that the analysis is properly documented and retained on the IASB’s website. This does not prevent the IASB discussing low and negative interest rates, which it plans to do later in 2017.

The IASB will continue its discussions on Primary Financial Statements. The staff are recommending that entities be required to have a subtotal in the income statement for EBIT. They know that this will require future discussion of what constitutes finance income and expense from ordinary activities and how earnings from associates fits in. The staff are also recommending that entities be permitted to present a measure of operating performance, using their own definition. The papers also discuss the general aggregation principles.

The IASB will conclude its public discussions on the Conceptual Framework. The staff are recommending that entities that have rely on the Framework to develop policies for regulatory account balances be required to continue to use the existing Framework until they apply the future Standard on rate-regulated activities.

There will be a brief oral update on the Insurance Contracts project.

Wednesday 22 March

The IASB will have an education session on Dynamic Risk Management. The staff plan is to have the IASB identify a preferred model by about October 2017, which would then be developed further.

The financial instruments with the characteristics of equity project will wrap up its current phase. The IASB will discuss how the proposed model would apply to derivatives in an entity’s own equity in a group scenario when the functional currency of the parent differs from that of the subsidiary. They will also assess the implications of the model for other Standards, particularly IFRS 2 Share-based Payments and IAS 33 Earnings per Share. The next step is the preparation of the Discussion Paper.

Our pre-meeting summaries are available on our March meeting note page and will be supplemented with our popular meeting notes after the meeting.

Mark will take up his position from 1 April 2017.

Please click for the corresponding press release on the FRC website.

The Board will discuss the following:

• Wider corporate reporting.
• Goodwill and impairment.
• Discount rates.
• Primary financial statements.
• Conceptual framework.
• Insurance contracts.
• Dynamic risk management.
• Financial in­stru­ments with char­ac­ter­is­tics of equity.

The full agenda for the meeting can be found here. We will post any updates to the agenda, our com­pre­hen­sive pre-meet­ing summaries as well as observer notes from the meeting on this page as they become available.

Up at the top of the current pronouncements from the UK’s Financial Reporting Council there is a new and additional logo. It celebrates 25 years of the UK Corporate Governance Code, for which the FRC is responsible. Anniversaries are times to celebrate, and the achievements of the steadily evolving Code are certainly worthy of that. But they are also times to take stock and seek change and reform where necessary. And this is what is happening. The FRC recently released its response to the UK Government’s Green Paper on such reform. And in particular it drew attention to the lack of coherent action relating to Section 172 of the Companies Act. This Section says that the duty of company directors requires them to act in a way that is most likely to promote the success of the company for the benefit of its members as a whole. The FRC wants this to be wider and for directors to be more accountable.

‘There is a clear link’, it says in its letter to the Government, ‘between the duty under section 172 and the reputation and brand values of companies, which encourages directors and responsible shareholders to engage in a full consideration of these wider factors’. And adding detail to this idea the FRC says: ‘There is no specific reporting requirement on how the matters referred to in section 172 are taken into account by directors in promoting the success of the company. Ultimately boards should be required to demonstrate how they had regard to wider stakeholders in their key decisions. There is a need to explore mechanisms which will enable this section to deliver its purpose more effectively. This would best be achieved by introducing a legislative requirement to report against the section’.

These ideas have been backed by a powerful grouping of other bodies, coordinated by David Pitt-Watson, one of the most respected names in the corporate governance field, in a letter to the Prime Minister. The letter, representing the views of the International Corporate Governance Network, the UK’s Institute of Directors, the governance institute ICSA, and the Trades Union Congress, also focuses on the section 172 issue.

‘There is no effective mechanism for policing this law’, it says, ‘which means that if companies – particularly private companies where there is little or no institutional oversight – do abuse the law, they are not always held to account. This gap in our governance system has allowed the poor practice of some to undermine people’s trust and confidence’. It is about global objectives. For this to work well you need to look at the company directors and how they behave. But quite another question is who are the shareholders? And the world has changed in that regard too.

A paper from the governance institute, ICSA, makes the point that ‘In the 25 years since the Cadbury Committee reported, our expectation of corporate governance has gone from “improving control and accountability” to “restoring faith in capitalism”’. The original objectives may not be so effective on a global stage. As the paper points out: ‘It may be tempting to believe that shareholder interest can be a proxy for public interest. In 1992 – when 70% of shares were owned by UK pension funds, insurance companies and individuals – that might even have seemed plausible. Yet looking at the ownership base today, with over 50% of shares owned by overseas investors, it would be illogical to do so. Why should we expect the citizens of Norway or the retired teachers of California, for example, to feel they have a responsibility to look after the best interests of UK society?’ In such a world CalPERs, the Californian institution that is the largest US pension fund, is indeed just as important as the British Rail pension fund, if not more so.

And just to underline this Chris Hodge, policy advisor at ICSA, had this to say at the launch of the paper: ‘Fast forward to 2015, and the G20/OECD Principles – the global standard for governance - defined the purpose of corporate governance as follows: “To help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies”’.

We are indeed in a different world. But it is also important to remember the fundamentals. The financial statements are prepared for a particular type of user, the investors, the providers of risk capital and credit, and everything there has to be provided through that lens. It is clear that the shareholder today needs to be an ‘enlightened shareholder’ and therefore told about many non-financial factors affecting companies’ long-term value creation. But all of that information needs to be fair, balanced and understandable and still needs to be told through the lens of the provider of capital. Multi-stakeholder information can be wide. The statutory information must remain focussed on its specific purpose.

The con­fer­ence will include an IASB update and implementation and technical break-out sessions on IFRS 9, IFRS 15, IFRS 16, primary financial statements, conceptual framework, and post-implementation review of IFRS 13. In addition, the conference will contain sessions on insurance and materiality as well as the future of corporate reporting.

More details, including reg­is­tra­tion in­for­ma­tion, are available on the con­fer­ence website.

The IFRS Taxonomy 2017 is consistent with IFRSs as issued by the IASB at 1 January 2017 and incorporates the finalised taxonomy update 1 and the finalised taxonomy update 2, published by the IFRS Foundation in April and in December 2016 respectively. Final changes resulting from the proposed taxonomy update 3 published in December 2016 have been incorporated directly into the IFRS Taxonomy 2017.

On 28 March 2017, the IFRS Taxonomy team is holding two webinar sessions  (one in the morning, one in the afternoon) to answer questions about the IFRS Taxonomy 2017.

For more information, see the press release and the IFRS Taxonomy 2017 page on the IASB's website.

At the event, delegates took stock of the current landscape in public financial management and emphasised the need to increase both the availability and use of high-quality accrual information to improve public sector transparency and decision-making. They debated with an invited audience how accrual can support strong public financial management and the role of various stakeholders in developing demand for the better information it provides. IPSASB Chair Ian Carruthers stated: “IPSAS – high-quality global accrual-based accounting standards – enable governments to produce high-quality financial information that leads to better decision making and builds accountability and trust with citizens”. However, OECD reserach presented at the conference showed that most stakeholders are still not using governments’ accrual-based financial information in a meaningful way.

The event was also seen as a first step in deciding IPSASB’s strategic direction and projects for the next five years and how it will work with other bodies to strengthen public financial management globally.

A high-level summary of the event is available on the IPSASB website. The OECD study is available here.

On-going discussions

The Committee will consider whether to recommend to the IASB that it finalise its narrow-scope amendments to IAS 19 Employee Benefits in relation to plan amendments, curtailments or settlements (Agenda Paper 2) and proposed amendments To IFRS 3 Business Combinations and IFRS 11 Joint Arrangements in relation to previously held interests (Agenda Paper 9). The Committee will also revisit IFRS 9 Financial Instruments and the discussions about modifications and exchanges of financial liabilities. The IASB has asked the Committee not to take this matter onto its agenda and to issue a tentative decision to that effect.

Finalisation of draft agenda decisions

The Committee will consider the public feedback on four matters which it had tentatively decided not to add to its agenda:

• IFRS 10 Consolidated Financial Statements: Investment entity consolidation (Agenda Paper 8A);
• IAS 28 Investments in Associates and Joint Ventures: Fund manager’s significant influence over a fund (Agenda Paper 8B);
• IAS 12 Income Taxes: Deferred taxes in asset acquisitions (Agenda Paper 8C); and
• Commodity loans (Agenda Paper 8D)
  

In each case the staff are recommending that the Committee finalise the decision.

New issues

There are six new issues:

• IAS 19 Employee Benefits: Discount rates (Agenda Paper 3)
• IAS 33 Earnings per share: Tax consequences of dividends on participating equity instruments (Agenda Paper 4)
• IFRS 1 First-time Adoption of IFRS: Subsidiary as a first time adopter (Agenda Paper 5)
• IAS 12 Income taxes: Interest and penalties (Agenda Paper 6)
• IAS 41 Agriculture: Fair value of biological assets growing on bearer plants (Agenda Paper 7)
• IAS 32 Financial Instruments: Presentation: Centrally cleared derivatives (Agenda Paper 10)

In each case the staff are recommending that the Committee not take the matter onto its agenda.

The pre-meeting summaries for the meeting can be found here. We will update this page for our Deloitte observer notes from the meeting as they become available.