The survey ‘Improving confidence in the value of audit – a research report commissioned by the Financial Reporting Council’ (“the survey”) was undertaken by the FRC to “take stock of where audit is exactly” as the FRC was of the view that “confidence may have been on the decline for a number of years amongst key groups”.  A number of interviews were held across three groups reflecting the varying levels of direct involvement that stakeholders have in the audit process – from policy makers/influencers to auditors and accounting bodies.  Findings indicate that “the level of confidence that stakeholders have in audit has a very close relationship to their experience of the day to day audit process”. 

The survey indicates that “broadly speaking those stakeholders that are most closely involved with the day to day process of audit (financial directors, CFOs, audit firms, some accounting bodies and audit committee chairs) possess the highest confidence in audit and are least likely to advocate large-scale structural reform”.  This group is “confident in the quality of audit” and has a “high confidence in the audit service and auditor qualities” but understands the expectations gap that exists between “what the public understands and expects and what audit is actually designed to do”.  This group of stakeholders would “like to see a more competitive audit market and a better public understanding of the role of audit and its purpose”.   

That level of confidence is not shared by “those with a direct interest in the outputs of audit, but with less involvement in the day to day audit process” such as regulators and investors.  The survey highlights that these groups “have less confidence in the current audit arrangements and are likely to propose changes to the process, culture and competitive environment”.  The concerns of this group focus around auditor objectivity and independence which they see “as a significant issue” and these support measures to increase the “independence and transparency of the audit process, such as mandatory rotation, mandatory retendering or limiting non-audit fees”.     

Those such as journalists and academics are “the least confident group of stakeholders and are more likely to demand large-scale conceptual and structural re-assessment of audit”.  This group of stakeholders would like audit to be “redesigned to refocus on delivering more public protection”.     

In part response to the survey and to improve the quality of audit the FRC has announced: 

In the near to medium term, the FRC will focus on the expansion of its audit inspection work in line with recommendations from the Competition Commission, the implementation of the new EU Directive on statutory audit and enhancing the quality of bank audits, including through its thematic review of audits in this sector. It will also develop best practice guidance for audit committees on assessing audit quality; assess whether the ethical standards for audit remain fit for purpose; and review audit firm governance including whether the declining proportion of audit in the total business of the major audit firms poses unacceptable risk to audit quality and capacity. 

On a longer term horizon, the FRC will “assess whether any change to the scope of audit is necessary to meet investor expectations”.  Such examples may include considering the auditor’s role in connection with narrative reporting and non-GAAP measures. 

The FRC highlights that their measures are intended to:

• Enhance transparency of audits;
• Enhance the transparency of audit quality;
• Enhance the relevance to users of the auditor’s role;
• Manage auditor conflicts of commercial self-interest;
• Address threats to audit quality from close auditor relationships with companies; and
• Address public confidence in the audit of banks. 

The FRC has recently published their ‘Plan and Budget and Levies 2014/15’ which includes measures aimed at achieving these objectives during the next year. 

Click for:

• Press release (link to FRC website).
• ‘Improving confidence in the value of audit – a research report commissioned by the Financial Reporting Council’ (link to FRC website).
• Our previous UK Accounting Plus news item on the FRC ‘Plan and Budget and Levies 2014/15’.

The proposals stem from earlier consultations on directors’ remuneration (October 2013) and risk management, internal control and the going concern basis of accounting (November 2013).  As a result of those consultations and feedback received, the FRC is proposing changes in the Code in relation to: 

Directors’ remuneration 

The FRC proposes changes to Sections D and E and Schedule A of the Code.  It proposes that:

greater emphasis be placed on ensuring that remuneration policies are designed with the long-term success of the company in mind, and that the lead responsibility for doing so rests with the remuneration committee;

companies should put in place arrangements that will enable them to recover or withhold variable pay when appropriate to do so, and should consider appropriate vesting and holding periods for deferred remuneration; and

companies should explain when publishing AGM results how they intend to engage with shareholders when a significant percentage of them have voted against any resolution.

Risk management and going concern

The FRC proposes changes to Section C of the Code relating to principal risks and monitoring the risk management system and future viability and going concern.  It proposes that:

companies should state in their financial statements whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so;

companies should robustly assess their principal risks and explain how they are being managed and mitigated;

companies should state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. It is expected that the period assessed will be significantly longer than 12 months; and

companies should monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report.

The above will require companies to make two separate statements covering a company’s future viability and going concern.  The FRC comments that “the proposed wording attempts to deal with the matters to be considered when making the assessment, the time horizon that it covers, and the degree of certainty that can be attached to it in a way that would encourage companies to provide meaningful disclosure tailored to the specific circumstances of the company rather than producing standardised or heavily qualified statements”. 

Alongside the proposed changes to the Code, the FRC is also consulting on extracts from its proposed integrated going concern, risk management and internal control guidance for directors of listed companies.  The FRC proposes, in an appendix to the consultation, draft guidance to directors on adopting and reporting on the going concern basis of accounting and also draft guidance to directors on providing the longer term viability statement.  This draft guidance reflects comments received to its earlier consultation ‘Risk management, internal control and the going concern basis of accounting: Consultation on draft guidance to the directors of companies applying the UK Corporate Governance Code and associated changes to the code’.  

Aside from the changes to the Code the FRC highlights that: 

• It intends to issue separate guidance to the directors of banks on solvency and liquidity risks and the going concern basis of accounting as indicated in its November 2013 consultation.  The previous guidance consulted on in November will be updated to reflect the outcome of the consultation.
• It will revise auditing standards to maintain consistency with the results of the consultation and will issue those revised standards alongside the revised Code.

Location of corporate governance disclosures 

The consultation also seeks views on “whether there would be benefits in allowing companies to publish some or all of the information currently contained in the corporate governance report on a website rather than in the annual report and accounts”.  If respondents agree that this would be beneficial this change will be considered in 2016. 

The FRC invites comments, in writing, until 27 June 2014. 

Click for:

• Press release (link to FRC website).
• FRC consultation ‘Proposed revisions to the UK Corporate Governance Code’.
• Our previous UK Accounting Plus news item on the FRC consultation on executive remuneration.
• Our previous UK Accounting Plus news item on the FRC consultation on revised guidance for directors of listed companies. 
• Deloitte 'Governance in brief' on the proposals.

The IPSASB Governance Review Group consists of members from the International Monetary Fund (IMF), Organization for Economic Cooperation and Development (OECD), the World Bank, Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO) and the International Organization of Supreme Audit Institutions (INTOSAI).

The Review Group's consultation paper responds to concerns that the existing governance arrangements of the IPSASB are not subject to a formal public interest oversight mechanism, outlining a number of possible options for strengthening the IPSASB's governance arrangements:

• Option 1 - extending the scope of the IFRS Foundation Monitoring Board and Trustees activities
• Option 2 - establishing separate monitoring and oversight bodies for the IPSASB while it remains under the auspices of the IFAC
• Option 3 - re-establishing the IPSASB outside of IFAC with its own monitoring and oversight bodies.

The IPSASB's response to the consultation paper, in unanimously supporting Option 2, sets out the IPSASB's view that "this alternative meets all of the characteristics for strong public interest oversight... accountability, independence, competence and credibility" and that it is "a practical and timely solution".

In addressing concerns outlined in the consultation paper that retaining IPSASB under the auspices of IFAC results in perceived conflicts of interest, the IPSASB response notes the following:

The factual experience of the IPSASB has been that there has never been any interference by IFAC with respect to the IPSASB’s independence or any interactions that have been negative in any way. We have found that in many respects IFAC’s involvement is in fact a strength - because the participation of the accountancy profession adds an element of independence from the principal users of our standards, governments and international organizations. This is unlike other IFAC standard-setting boards which are setting standards for IFAC member body members themselves.

In addressing the structure and mandate of an oversight body under its preferred option, the IPSASB notes its view that the monitoring and oversight function could be merged and carried out by a single body. In the IPSASB's view, membership of the body would not require technical expertise, but members "should be enthusiastic about the need for public interest oversight... and have strong support for fiscal transparency". IPSASB's proposed role for the oversight body would include an ability to approve or comment on the IPSASB's strategic and work programmes. In addition, the IPSASB supports the creation of a Consultative Advisory Group (CAG), whose roles would include providing advice on the IPSASB's agenda and project timetable (including priorities) and the provision of technical advice on projects.

The IPSASB's response outlines a number of reasons as to why the IPSASB does not believe that extending the scope of the IFRS Foundation Monitoring Board and Trustees activities to encompass public sector accounting standard setting is appropriate, including:

• Considerable questions as to whether the IFRS Foundation would be willing to take on IPSASB oversight and commit appropriate resources
• A lack of clarity about how the oversight of the IPSASB would be integrated into the IFRS Foundation's oversight framework, and the impacts on the structures and processes of the IPSASB and International Accounting Standards Board (IASB)
• Some criticism that International Public Sector Accounting Standards (IPSASs) are already "too close" to International Financial Reporting Standards (IFRS).  The IPSASB comment that the Eurostat report on the suitability of IPSASs for EU Member States highlight this criticism of the IPSASB and that bringing IPSASB under the oversight of the IFRS Trustees would "reinforce that criticism".

In terms of the third option of re-establishing the IPSASB outside of IFAC, the IPSASB believes there is insufficient detail in the consultation paper to enable debate about whether this is a realistic option and that it "raises significantly more issues".

Click for the full IPSASB consultation response (link to IFAC website).

The IAASB issued an exposure draft for a revised International Standard on Auditing, ISA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing or Accompanying Audited Financial Statements and the Auditor’s Report Thereon in November 2012.

Changes included in the revised exposure draft for a revised IAS 720, The Auditor’s Responsibilities Relating to Other Information, include:

• Introducing a definition of an 'annual report' and limiting the scope of other information reviewed by an auditor to information contained in annual reports as defined, thereby excluding consideration of separately issued industry or regulatory reports, corporate social responsibility reports, sustainability reports, and similar documents
• Clarifying the obligations of an auditor in respect of other information, requiring an auditor to consider whether there is a material inconsistency between the other information and the auditor's knowledge obtained during the course of audit, and requiring the auditor to remain alert for other indications that the other information appears to be materially misstated
• Including a definition of 'misstatement' to address concerns the ordinary meaning of this word in the context of other information is subjective and could lead to divergence in practice
• Addressing the auditor's responsibilities in relation to other information obtained after the date of the auditor's report.

Comments on the revised exposure draft close on 18 July 2014. Click for press release (link to IFAC website).

The measures have arisen as a result of concerns from the investment community about the governance of premium listed companies with a controlling shareholder and protecting the interests of minority shareholders. Much of the concern was whether the minority shareholders could participate effectively in the governance of the company where the interests of the controlling shareholder conflict with those of the minority.

CP 13/15 proposes a number of changes that affect premium listed companies with a controlling shareholder and also proposes a number of changes that affect all premium listed companies, whether or not they have a controlling shareholder.

The FCA Board is being asked to approve these proposals.  If approved, they are expected to come into force on 16th May 2014.

Click for:

• Press release (link to FCA website).
• Our previous UK Accounting news item on the proposals contained within CP 13/15.

The FRC has identified the following activities as areas of focus in 2014/15:  

Governance and Stewardship

The FRC will continue to promote a longer term approach to corporate governance and investor stewardship, by:

• updating the provisions of the UK Corporate Governance Code in relation to risk management, going concern and remuneration;
• encouraging fuller explanations as part of the 'comply or explain' framework;
• engaging with investors to better understand their information needs; and
• encouraging investors to give more disclosures around stewardship. 

Corporate Reporting

The FRC will address the needs of investors from corporate reporting, by;

• supporting companies in complying with new requirements such as the statement that an annual report is 'fair, balanced and understandable', for example through the work of the Financial Reporting Lab;
• promoting more useful auditor reporting;
• influencing EU and international  reporting developments, including IASB and IAASB initiatives such as the IASB's Conceptual Framework and Disclosure Framework projects; and
• evaluating how it can assist smaller listed and AIM companies to improve confidence in their financial statements by improving the quality of their reporting. 

Audit Quality

The FRC will work to promote audit quality by:

• undertaking its annual programme of approximately 125 audit inspections and imposing sanctions when poor quality audits are identified; and
• undertaking a thematic review of the auditing of banks and building societies. The need for improvements in the quality of auditing of financial institutions was highlighted as a key concern in the 2013 Audit Quality Inspection Report and the FRC recently commented that “the pace of improvements in the quality of auditing of banks and building societies has not been sufficient”.

Investigative, monitoring and disciplinary procedures

The FRC will address the consequences of major legislative change and other proposals affecting audit and audit monitoring, which will add very significantly to its workload.  Its goal is to secure that this additional work delivers a notable improvement in audit quality.

These legislative changes include the Competition Commission recommendations, the EU audit Directive and Regulation and a new requirement for the FRC to review local government audits.

As well as the areas listed above, the FRC will also continue its work to promote the quality of actuarial work.

The full details of the plan and budget and press release can be obtained from the FRC website.  Our previous story on the draft plan and budget sets out further information on the background behind these areas of focus.

The consultation, which closed in November 2013, was part of the UK Government's 'Red Tape Challenge' and proposed a number of measures to decrease the regulatory burden on companies as regards their communication with Companies House.

Following the responses to this consultation, the government is now proposing the following changes:

• Replacing the annual return with a more flexible system where companies can confirm whether their company information is correct and complete at any point in a year.
• Allowing private companies to maintain various information directly on the public register at Companies House, rather than keeping it on separate internal registers.  This covers the register of directors; directors' residential addresses; secretaries; members; and the register of beneficial ownership proposed by the government in its 'Transparency and Trust' proposals.
• Changing the required content of a company's Statement of Capital.
• Widening the circumstances in which companies can choose to receive electronic communications from Companies House.
• Simplifying the procedures for resolving issues with a company's registered office address, confirming the appointment of directors and striking off a company.

The Government intends to bring forward legislation to implement these proposals as soon as Parliamentary time allows.

As a result of feedback received, the original proposal to mandate a single date for filing accounts with Companies House and HMRC has been dropped in favour of making changes to the joint filing tool to make the provision of simultaneous information more attractive. The proposed changes to the requirements for reporting a company's subsidiaries will now be pursued as part of the implementation of the revised EU Accounting Directive.

The full outcome report can be downloaded from the BIS website.

The response to the Transparency and Trust discussion paper is also available from the BIS website. This report, which was issued earlier this month, proposes the establishment of a new central registry of UK company beneficial ownership information, as well as other changes to improve the transparency of company ownership and control. 

The homepage of the Research Centre encourages interaction through four main sections:

• How you can help contains descriptions of the research issues on which the IASB will be working in the next two to three years and where the IASB is seeking input from the broader research community.
• Get started lists topics and issues that could be of interest to the academic community and includes links to papers written by IASB staff.
• Get involved provides information about ways to get involved with the research work of the IASB, including the possibility of joining the organisation through its Academic Fellowship programme.
• Stay informed gives access to the IFRS Research Round-up. A first issue of the newsletter has been published together with the launch of the Research Centre.

Please click for access to the press release on the IASB website announcing the launch of the centre.

The bulletin considers (1) issues of complexity in financial statements, (2) possible causes, and (3) provides suggestions to the conceptual framework that may reduce the complexity.

FEE agrees with the definition of complexity in the bulletin and also believes that there is a direct relationship between complexity, the costs to preparers and the benefits to users of financial statements. FEE also agrees that the standard-setting process could - to some extent - add to complexity. However, FEE does not support the statement that the standard-setting process contributes to the "avoidable" part of complexity whilst only the complex business environment leads to "unavoidable" complexity:

FEE considers that attempting to distinguish avoidable and unavoidable complexity is a judgmental exercise and we question whether this is necessary in order to address the issue.

FEE therefore comes to the conclusion that complexity should not be considered as a primary factor in standard-setting. Instead, FEE believes that assessing whether undue complexity was introduced in a standard should be considered as part of the field testing and the costs and benefits analysis of a standard.

Please click to access the full comment letter on the FEE website.