Page 1 of 3 ▪ Written evidence to BEIS Select Committee by ACCA

Response from ACCA to the consultation by IAASA on the publication and grading policy for PIE audit firms. Summary

ACCA is pleased to respond to this consultation on a matter of significant importance to chairs of audit committees, investors and other stakeholders in the audit of public interest entities and their financial statements. We very much welcome the initiative by IAASA to publish information relevant to the needs of stakeholders.

However, we believe that the proposed information to be included in the public reports is unnecessarily complicated and susceptible to subjectivity. While we believe that information provided to the audit firms should be as detailed and as informative as possible, the information made available to the public should be as concise and as useful as possible. What the users of these public reports need to know is whether the audits undertaken by an audit firm are reliable and, therefore, fit for purpose. Our response below proposes that IAASA should adopt a simpler approach by basing its assessment on whether the objectives of the audit have been met.

The approach we suggest that IAASA adopts is closely aligned to that used by the US Public Company Accounting Oversight Board (PCAOB). The review of the effectiveness of UK audit regulation undertaken by Sir John Kingman recognizes the strength of audit regulation in the US.

About ACCA

1. ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants.

2. ACCA supports its 208,000 members and 503,000 students in 179 countries,

helping them to develop successful careers in accounting and business, with the skills required by employers.

Reason for submitting evidence

3. ACCA has a vision to develop the ‘accountancy profession the world needs.’ As such we need to have an insightful, forward-looking, substantiated view of the way forward for the audit profession and its stakeholders. A minority of our members are auditors; however, professional accountants are heavily involved in this ecosystem of business reporting and stewardship, as both participants and stakeholders.

4. As a chartered professional body ACCA has remit, as directed by the Privy Council, to act in the public interest. To this end ACCA frequently examines the effectiveness of the systems under which the accountancy profession, including audit, operates, and the ways in which it can be improved, and endeavors to ensure that the public understands the role, responsibilities and limitations of audit.

Page 2 of 3 ▪ Written evidence to BEIS Select Committee by ACCA

Question 1 - Are stakeholders satisfied with the proposed mechanism of indicating the severity of findings in relation to the effectiveness of the design or implementation of a firm’s quality control system?

5. While the “RAY” system of classifying the severity of findings in relation to the effectiveness of the design or implementation of a firm’s quality control system will provide useful information to the audit firm, we do not believe that it should be used in disclosing these findings in the public reports. Determining the severity of these findings will require a considerable amount of professional judgment on the part of IAASA and may therefore involve a significant degree of subjectivity. We are also concerned about how this information will be interpreted by users of these reports, given that they may not significantly impact all audits conducted by the firm and may have been addressed satisfactorily. We therefore suggest that only those findings classified as “red” and currently reported through to IFIAR are disclosed in the public report. Question 2 – Are stakeholders satisfied with the proposed mechanism of assigning a grade to the individual public-interest entity audits inspected as part of the quality assurance review process?

6. We believe that the proposed mechanism to grade individual public-interest entity audits is unnecessarily complicated and susceptible to subjective judgment by IAASA reviewers. What the public needs to know is whether or not the audits inspected were reliable and therefore fit for purpose.

7. We therefore believe that any concerns regarding the sufficiency or quality of audit evidence or the appropriateness of significant audit judgments in the areas reviewed should be assessed against the objectives of an audit. International Standard on Auditing 200 explains that the objectives of an audit include obtaining reasonable assurance as to whether the financial statements are free from material misstatements and whether they are prepared in accordance with the applicable accounting framework. It therefore follows that a single material deficiency in compliance with auditing standards may render an audit to be unsatisfactory and not fit for purpose.

8. The approach we support is consistent with that adopted by the US Public Company Accounting Oversight Board. It is noteworthy that the report issued by Sir John Kingman on the effectiveness of audit regulation in the UK suggests that the approach adopted by the PCAOB to audit regulation is more effective than that operating in the UK

Page 3 of 3 ▪ Written evidence to BEIS Select Committee by ACCA

Question 3 - Are stakeholders satisfied with the proposed initial publication of audit quality inspection reports in batches? What are stakeholders’ views in relation to timing of publication after the initial publications?

9. We understand why IAASA would wish to issue reports in batches and are supportive of this approach. However, care should be taken to ensure that as a result of this approach, reports are issued on a timely basis after an inspection, so that this vital information is made available to users as soon as practicable.

Please email sha.alikhan@accaglobal.com for any queries.

Lisa Campbell Head of Statutory Reporting Quality Irish Auditing and Accounting Supervisory Authority Millennium Park Naas Co Kildare 31 January 2019 [Submitted via email to: submissions@iaasa.ie] Dear Lisa

Consultation Paper: The future publication and grading policy for audit firms that carry out statutory audits of public interest entities

Chartered Accountants Ireland (the Institute) is pleased to have the opportunity to respond to the Authority’s important consultation paper on public reporting and grading arising from quality assurance reviews of public interest entity (PIE) audits. We noted and welcomed the Authority’s conclusion, included in its most recent annual report, that based on the first round of inspections undertaken, audit quality in Ireland is of a good standard.

The Institute supports measures that will enhance audit quality and public confidence in audit. The Institute considers it essential in this regard to implement a publication and grading regime that is proportionate and provides fair and balanced reporting across all PIE audit firms. This will be equally important in ensuring the sustainability and attractiveness of the audit profession into the future.

The Institute supports the principle of transparency underpinning the publication by the Authority of such information. We note that such public reporting processes are in place in jurisdictions such as the UK and the US and consider that Ireland should also have an appropriate and proportionate reporting regime. In practice, we are aware that some clients of Irish PIE audit firms with primary or dual listings on exchanges in the UK, and elsewhere where such reporting exists, have requested similar regulatory information privately from Irish firms.

However, we note the Authority’s review of the publication and grading policies in other EU Member States, and also that the Authority has not publicly consulted on the decision to publish inspection reports. As such, we consider that it would be beneficial to the Irish market for the Authority to issue a clear statement publicly regarding the rationale for the decision to implement a public reporting regime. Such a statement could helpfully address, for example:

The Authority’s view on how publication will contribute to improved audit quality and competition in the PIE audit market, also in the context of decisions made in this regard in other EU Member States; and

The Authority’s approach to ensuring accuracy of published reports and the fairness across all PIE audit firms of its publication and grading policies.

Whilst not specifically addressed in the consultation paper, we understand the overall objectives of public reporting on PIE audits to be twofold, namely supporting and enhancing Irish audit quality, leading to enhanced public confidence

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in Irish corporate reporting. We consider these objectives to be paramount to the development and application of Authority’s publication and grading polices. Every effort should be made to ensure that the risk of misinterpretation of the findings and gradings in the public reports by key stakeholders is minimised.

In our view it is of the utmost importance that the Authority implements a proportionate, high quality and robust framework for its inspection and reporting processes, applied consistently to all inspections and reports. In this regard, it would be very helpful to understand:

The quality assurance process applying to the work of the Authority’s Audit Inspections Unit (AIU) - e.g. consideration of inspection reports by an independent committee, peer review by other audit regulators;

The right of appeal available to a PIE audit firm which disagrees with findings or gradings in an inspection report;

How the Authority intends to ensure consistency with the gradings applied by the regulatory functions of this Institute and the other recognised accountancy bodies with regard to their inspections of non-PIE audits.

It is essential that the Authority’s inspection/reporting teams and the PIE audit firms have a thorough and shared understanding of the objective measurement bases underlying the findings and gradings. As such, we believe there would be significant merit in the Authority giving consideration to creating more time to make the process as effective and efficient as possible. This could be achieved, for instance, by undertaking the initial public reporting for the second round of inspections from 2019 on a thematic basis, while providing the specific findings and gradings privately to the firms. Allied to the information provided from the first round of inspections, such an approach would allow for the Authority and the PIE firms to have a better understanding of the trends emerging from the inspections conducted by the Authority.

Our comments on the specific questions posed in the consultation paper are set out below.

Q1 Findings on design or implementation of a firm’s quality control system

Whilst we do not have an objection in principle with the proposed publication of findings with regard to a firm’s quality control system, the main question/concern we would have relates to the robustness and transparency of the methodology/framework for applying the ‘red-amber-yellow’ (RAY) system and how consistently it can be applied across firms. We note that the equivalent findings are reported by the FRC in the UK as narrative findings, rather than being graded in this manner. Also, we would note that neither the Authority nor the firms have much experience of the expectations of the AIU as regards firms’ quality control systems. There may be a number of different ways in which a firm can achieve compliance with the requirements of ISQC1. Additionally, there is likely to be a significant risk of misinterpretation by the public of such gradings. As such we would recommend that, at least in the initial reporting periods, the Authority considers adopting a narrative reporting approach similar to the UK. In such initial periods, discussions with the firms could apply the RAY approach privately such that all protagonists gain a sufficient understanding of the AIU’s methodology and application of such methodology, while allowing for evidence to be gathered as regards the robustness of the RAY approach. In this context, we would also note that in the US, the PCAOB does not rate in this manner and, in fact, reports privately on firm’s quality control systems, publishing only where remediation is not to the PCAOB’s satisfaction.

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Q2 Grading mechanism for individual PIE audits inspected

We are satisfied with the proposed approach for the grading of individual audits. As discussed in the introductory comments above, we consider it of the utmost importance that a consistent and transparent approach by the Authority to the assessment of findings, to the gradings, and to the reporting of both, is critical to the success of the Authority’s publication and grading policy in the public interest.

As also discussed earlier, however, we believe that there would be merit in the Authority considering an approach whereby the initial reporting is undertaken on a thematic basis, allowing both the Authority and its inspection/reporting teams, and the PIE audit firms, to gain more experience of the process and the Authority’s expectations.

We would also encourage the Authority to provide a balanced analysis in published reports, emphasising positive as well as negative findings. We consider that such an approach would provide useful information for stakeholders and promote public trust in audit. We would also recommend that the report discloses the basis for a grading, i.e. which individual findings contributed to the grading. Furthermore, the basis for individual findings should be disclosed so that a reader of the report can understand where, for example, there is a difference between the AIU and the PIE audit firm in the interpretation of the requirements of a particular standard.

Q3 Proposed quality inspection reports

Subject to our comments above, we agree with the proposed approach to the form and content of the proposed audit quality inspection reports. In particular, we agree that the names of the entities audited are not disclosed and that comments are not ascribed specifically to the audits of those entities. In that context, however, we note that given the size of the Irish market, achieving such anonymity may not be as straightforward a task as in larger jurisdictions such as the UK. As such, there is the potential to unduly influence the market and therefore great care will need to be taken in describing and referencing any firm findings in the reports. In terms of public confidence in Irish corporate reporting, we would emphasise the importance of the comments made in the consultation paper about the existence of one or more findings arising from audit inspections not automatically being equated with a deficiency in the relevant financial statements of the entity or entities in question.

Q4 Proposed initial publication of audit quality inspection reports in batches

We would draw a distinction between the proposed cycle of inspections, being the four largest PIE audit firms on an annual basis and the remaining five PIE audit firms over a three year cycle (subject to there being no prior significant deficiencies), and the proposed reporting cycle.

We would not favour a system of public reporting on firms individually as and when the reports are ready. As regards reporting on firms in batches, we consider it to be critically important that all the PIE audit firms be treated as equally as possible in this regard. We consider that batching of reports into specific groupings (e.g. largest four PIE audit firms separate from the other PIE audit firms) in the longer term would create a distinction between such groups of firms that is contrary to the objectives of the public reporting policy. Therefore, we consider that the ‘batching’ over reports should only be in a single batch on the basis of inspections carried out during a cycle of inspections.

As such, on the basis of the Authority’s stated intention to undertake inspections of the four largest PIE audit firms annually and the remaining PIE audit firms over a three year cycle, we consider that the ‘batching’ should be done on

4

an annual basis, i.e. reporting together on all inspections of PIE audit firms and audits carried out in a particular year. There were, however, some concerns expressed about the potential impact of this approach in terms of fairness vis-à-vis the PIE audit firms not inspected, and therefore reported on, in that year. Some members of the working group believe that there would be merit in the Authority considering a different cycle of inspections, such that each PIE audit firm would be inspected, and reported on, in a two year cycle. Arguments supporting such an approach include that all firms would then be treated equally and reported on at the same time. It was also suggested that, given the relative size of the listed PIE audit market in Ireland, a two year cycle would still represent significant coverage of the market. It was recognised, however, that there may be concerns about the timeliness and relevance of the reporting, particularly for inspections undertaken early in such a two year cycle. It may be an issue on which the Authority would consider having further discussions directly with the PIE audit firms.

If you would like to discuss the above comments or any other aspects of the proposed publication and grading system with us in more detail, please feel free to contact me on mark.kenny@charteredaccountants.ie or on 01-6377344 to arrange a meeting.

Yours sincerely

Mark Kenny Director, Representation and Technical Policy Chartered Accountants Ireland

EisnerAmper Audit Limited is an independent member of EisnerAmper Global Limited.

Directors: Alastair Mac Donald FCA, Diarmaid O'Keeffe FCA, Frank Keane FCA, Ray Kelly FCA, Ronan Murphy CPA, Patrick Cloran FCA.

Registered in Ireland, Company Number: 561070. EisnerAmper is a trademark of EisnerAmper Global Limited.

Mr Kevin Prendergast Chief Executive Irish Auditing & Accounting Supervisory Authority (“IAASA”) Willow House Millennium Park Naas Co Kildare

31 January 2019

Dear Kevin,

Consultation Paper: The future publication and grading policy for audit firms that carry out statutory audits

of public interest entities

EisnerAmper Ireland welcomes the opportunity to respond to IAASA’s consultation paper (“CP”) regarding its

intended publication and grading policy relating to quality assurance reviews of public interest entity (“PIE”) audits.

We fully support better regulation to improve audit quality and the effective application of such regulation. In this

regard, developments in the Irish PIE audit regulatory regime should be proportionate and balanced and encourage

new entrants to the PIE audit market, thereby promoting choice.

We have set out below our perspective on the matters in the CP on which IAASA is seeking views.

Q1 Are stakeholders satisfied with the proposed mechanism of indicating the severity of findings in relation

to the effectiveness of the design or implementation of a firm’s quality control system? Q2 Are

stakeholders satisfied with the proposed mechanism of assigning a grade to the individual public-interest

entity audits inspected as part of the quality assurance review process?

It is critical that every effort is made to ensure that the risk of misinterpretation by readers of findings or gradings

contained in IAASA inspection reports is minimised. As IAASA notes in its CP:

- “It would be inappropriate to infer that issues found within an individual audit inspected did, or would arise,

on any other audit that has been, or would be, performed by the statutory auditor or audit firm.”

- “Although audit quality inspection reports may comment positively on certain items, these reports are not

designed to give a balanced analysis of all areas.”

- “Where an inspection of an individual public-interest entity audit identifies an area where the firm did not

obtain sufficient audit evidence, this does not necessarily indicate that the audit opinion is inappropriate or

that the financial statements are misstated.”

In finalising and implementing its publication and grading policy, we would suggest that IAASA take into account

the following considerations:

- It is important that the reader of an inspection report understands the inspection methodology and the basis

for findings and gradings. Therefore, the findings that contributed to a particular indication of severity (in

relation to a firm’s quality control system) or grading (in the case of an individual PIE audit) should be clear

together with the basis for individual findings. Such an approach could assist a reader in understanding

where, for example, there was a difference between the Audit Inspection Unit (“AIU”) of IAASA and the

audit firm in the interpretation of the requirements of a particular auditing standard.

- As a means of understanding the PIE audit inspection process, readers and PIE audit firms would benefit

from information on the quality assurance process applying to the work of the AIU – for example, the extent

of review of inspection reports by an independent committee or peer review by other audit regulators.

- In the interests of fair procedure and natural justice, we would welcome clarity on what right of appeal or

other avenue is available to an audit firm where the firm disagrees with the findings or gradings in an IAASA

inspection report and how IAASA could ensure that such appeal processes would not be prohibitive from

a cost perspective.

- In addition to quality assurance reviews of PIE audits by IAASA, PIE audit firms are subject to quality

assurance reviews of non-PIE audits by recognised accountancy bodies such as Chartered Accountants

Ireland. To avoid a further layer of complexity, it would be useful to understand how IAASA intends to

ensure consistency in the gradings of the respective quality assurance reviews – particularly:

o where the same quality control system underpins both PIE and non-PIE audits;

o where there are no substantial differences between a PIE and non-PIE audit (e.g. two similar listed

funds where one fund is designated as a PIE by virtue of the particular market on which it is listed).

Q3 Are stakeholders satisfied with the form and content of the proposed audit quality inspection reports?

Q4 Are stakeholders satisfied with the proposed initial publication of audit quality inspection reports in

batches? What are stakeholders’ views in relation to timing of publication after the initial publications?

According to the European Commission1, the aim of the reform of the EU statutory audit market is to improve audit

quality and restore investor confidence in financial information. Furthermore, a competitive market for PIE audit

services in which there is a sufficient choice of audit firms capable of conducting such audits is required to ensure

a smooth functioning of capital markets2.

On the objective of contributing to a more dynamic and an ultimately less concentrated audit market, IAASA, as a

competent authority, has a role in regularly monitoring and reporting on developments in the PIE audit market,

including the assessment of market concentration levels3.

Considering the above context, and in the interests of transparency, an understanding of IAASA’s rationale for its

decision to publish individual inspection reports would be very beneficial to the Irish market, in particular why, in

IAASA’s view, its publication policy will enhance audit quality and/or choice in the PIE audit market. We would also

suggest that IAASA addresses the following matters:

- Recital 24 to Regulation (EU) No. 537/2014 states that “quality assurance reviews should be appropriate

and proportionate in view of the scale and complexity of the business of the reviewed statutory auditor or

audit firm.” In this regard, recent comments by the UK Competition & Markets Authority on the resilience of

large audit firms are instructive - for example: “Recent experience suggests that the Big Four firms appear

1 http://europa.eu/rapid/press-release_MEMO-16-2244_en.htm 2 Recital 30 to Regulation (EU) No. 537/2014 3 Article 27 of Regulation (EU) No. 537/2014

to be resilient. They have withstood the reputational harm caused by a number of high profile cases of

audit failure in the UK and elsewhere4.” Considering the above, how will IAASA address the risk that

publication of negative findings from an individual PIE audit inspection could have a disproportionate effect

on certain PIE audit firms?

- In the interests of transparency, IAASA is required to report regularly on its activities and to publish

information in aggregated form on findings and conclusions of inspections5. Furthermore, under Section

1494 of Companies Act 2014, IAASA “may publish on its website the findings and conclusions of individual

inspections undertaken.” Will IAASA’s publication policy allow for the exercise of any discretion in assessing

whether any factors may be present in the case of a particular inspection that could warrant non-publication

of the individual inspection report? By way of comparison:

o In the case of certain regulatory action taken by the Quality Assurance Committee (“QAC”) of

Chartered Accountants Ireland based on the findings of an audit inspection, the QAC may

determine that it is inappropriate to publish the name of a member or firm where publication “would

prejudice the interests of justice6.”

o Where IAASA imposes sanctions on an audit firm, provision exists for IAASA to publish the

particulars on an anonymous basis where it is of the opinion that the publication “would cause

disproportionate damage to the specified person7.”

- The CP refers to a review by IAASA to understand the publication and grading policies in 25 European

countries, with at least 20 of these countries having a policy of not publishing inspection reports, in contrast

to IAASA’s approach. It would be very useful to understand the rationale applied by the individual European

countries in deciding whether to publish, whether these countries consider their current publication regimes

to be effective and beneficial to the public interest and whether these countries have any plans to review

or change their current approach (to the extent that IAASA gained such an understanding). Such detail

could provide context for IAASA to explain its rationale to publish individual inspection reports.

We hope these comments are helpful to IAASA and we would be happy to discuss the points in more detail with

IAASA or provide further clarity.

We would also welcome further engagement with IAASA in due course following implementation of its publication

and grading policy to discuss any practical matters that may become evident upon adoption.

Yours sincerely

Diarmaid O’Keeffe

Partner

4 Paragraph 3.136 of Competition & Markets Authority Statutory audit services market study update paper of 18 December 2018 5 Article 28 of Regulation (EU) No. 537/2014 6 https://www.charteredaccountants.ie/docs/default-source/dept-professional-standards-(psd)/complaints/publication-policy-16-december-2017.pdf?sfvrsn=2 7 Section 1508(3) of Companies Act 2014

KPMG Telephone ÷353 1 410 10001 Stokes Place Fax +353 1 412 1122St. Stephen’s Green Internet www kpmg.ieDublin 2D02 DED3Ireland

Mr Kevin PrendergastIrish Auditing & AccountingSupervisory AuthorityWillow HouseMillennium ParkNaasCo Kildare

29 January 2019

Dear Mr. Prendergast

The future publication and grading policy for audit firms that carry outstatutory audits of public-interest entities

KPMG is pleased to provide our comments and observations on the Irish Auditing &Accounting Supervisory Authority’s (IAASA) consultation paper on ‘The futurepublication and grading policy for audit finns that carry out statutory audits of publicinterest entities’ issued on 29 November 2018.

We welcome IAASA’s overall objective to promote improvements in the quality ofauditing of public-interest entities and to thereby build trust and confidence in the auditsof financial statements of public-interest entities.

Approach to publication of audit firm inspection reports

We note that the publication of audit firm inspection reports takes place in jurisdictionssuch as the UK and the US and that in the majority of EU Member States publicationdoes not take place. The publication of audit firm inspection reports is not without therisk of misinterpretation of the findings and/or grades within those inspection reports.Audit inspections are, by their nature risk, focused and are not designed to give abalanced analysis of all areas or engagements. Therefore, it is imperative that IAASAimplement an audit firm inspection reporting framework (Framework) which is capableof objective and consistent application and interpretation by all stakeholders.

We believe this can only be achieved by applying the proposed Framework on aprivate field test basis during the second round of audit firm inspections to determinewhat refinements may be necessary to ensure the proposed Framework is capable ofobjective and consistent application and interpretation by all stakeholders. IAASA’scommitment to transparency may be achieved by other means during the second andsubsequent rounds of public inspections, for example by reporting on a thematic basis.We welcome the proposed continuation of the issue of private inspection reports toaudit firms by IMSA as we believe that these together with constructive dialogue withIAASA on matters arising and recommendations for remediation of deficiencies and/orimprovements, will continue to contribute significantly to continued improvement in thequality of audits of public interest entities.

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Offices Osbl,n, Belfast, Cork and GaiwayKPMG. en Irish partnership and a member rem 51 the KPMC networkof ,ndependent member firms affiliated with KPMG International KPMG a aushoriasd by Chartered Accountants Iretand to cattyCooperative (“KPMG InternasionaSt, a Swiss entity on Investment Business,

Irish Auditing & Accounting Supervisory AuthorityThe future publication and grading policy for audit firms that carry out statutory auditsof public-interest entities: Consultation response29 January 2019

We believe that the move to issue public inspection reports prior to the settling down ofthe new audit inspection regime in Ireland with which IAASA and the audit firms havelimited experience and is based on the application of a risk based approach to theselection of relatively small numbers of audits for inspection, has the strong potential tolead to incorrect assessments of audit quality in the Irish market by stakeholders.

Furthermore, in light of the majority of EU Member State audit regulators which do notmake public audit firm inspection reports or grades within those inspection reports webelieve IAASA should reconsider its policy in relation to implementing a public reportingregime. We believe, IAASA should carefully consider the experience of the FinancialReporting Council (FRC) in the UK and the Public Company Accounting OversightBoard (PCAOB) in the US of the public reporting of audit inspection reports. PCAOBrepresentatives have publicly stated that during its tenure, audit quality has improvedyet the rate of audit inspection findings has not. This paradox has undoubtedly led to adecline in investor confidence and trust in the audits of financial statements of publicinterest entities. We believe this paradox can be avoided by continuation of the privatereporting by IAASA to audit firms and following an anonymous thematic public reportingmodel until the new audit inspection regime in Ireland has settled down.

In relation to the specific matters on which view were sought, we note our responses asfollows:

1) Are stakeholders satisfied with the proposed mechanism of indicating theseverity of findings in relation to the effectiveness of the design orimplementation of a firm’s quality control system?

While we strongly believe IPASA should follow an anonymous thematic publicreporting model together with private reporting to audit firms for the reasons setout above, if the proposed Framework is to be followed, we do not object to theprinciple of grading whole of firm findings on the proposed ‘red-amber-yellow’(RAY) system.

However, we have significant concerns in relation to its objective and consistentapplication across firms. There are numerous ways in which a firm can complywith its obligations set out in International Standard on Quality Control (Ireland)1: Quality Control for Firms that Perform Audits and Reviews of FinancialStatements, and Other Assurance and Related Services Engagements (ISQC1). Indeed the obligations placed on audit firms in ISQC 1 often are of animprecise nature, therefore, there may be varying interpretations in relation towhat is required to achieve compliance with the standard. In that regard,IMSA’s expectations in relation to a firm’s quality control system play animportant role and we and indeed other firms have limited experience ofIAASA’s expectations in this area.

As an alternative to publicly reporting the results of the application of RAYsystem following its second round of inspections, we believe IAASA shouldpublish anonymous thematic reports. This will allow a period of time for all

Document classification: KPMG Confidential 2

Irish Auditing & Accounting Supervisory AuthorityThe future publication and grading policy for audit finns that carry out statutory auditsof public-interest entities: Consultation response29 January 2019

stakeholders to gain an understanding of how the RAY system would operate inpractice and allow IAASA to make refinements to the RAY system should theybe necessary following field testing of the RAY system.

2) Are stakeholders satisfied with the proposed mechanism of assigning agrade to the individual public-interest entity audits inspected as part ofthe quality assurance review process?

While we strongly believe IAASA should follow an anonymous thematic publicreporting model together with private reporting to audit firms until the new auditinspection regime in Ireland has settled down, for the reasons set out above, ifthe proposed Framework is to be followed we are not satisfied with theproposed mechanism of assigning a grade to the individual public-interest entityaudits inspected as part of the quality assurance review process.

We believe the definition of a “1” grade is overly restrictive due to the restrictionplaced on this grading by stating the grading is unlikely to be appropriate ifthere are any matters included in the report issued to the audit firm’. Thisimplies that a “1” grade can only be achieved by an audit engagement team thatexecutes a perfect audit. However, a good audit with no concerns regarding thesufficiency and quality of audit evidence or the appropriateness of significantaudit judgements may have areas that could be improved upon and thereforebe the subject of a finding in an audit inspection. This is more likely to be thecase in the audits of financial statements of large, complex public-interestentities. As a result there may be unintended negative consequences in terms

r t of investor perception of the quality of audits carried out in Ireland We note thatthe FRC equivalent of a 1” grading is described as a “Good audit” which wethink is a better way of describing the top grading of an audit Indeed we notethat the FRC combine their “1 (Good’) and 2a” (Limited Improvements’)graded audits into one category (“Good or Limited Improvements Required”) inthe published versions of their inspection reports on the firms

We believe the definition of significance is not sufficiently objective todetermine consistently whether a finding from an audit engagement inspection

gives

rise to: No Concern; Limited Concern; Less than Significant Concern;Significant Concern. Whilst the definition provides three factors to consider, theproposed Framework does not include an objective scale against which tomeasure the quantum of the concern related to each factor. For example, whilethe materiality of the area or mailer concerned is a factor in determiningsignificance, the proposed Framework does not set out at what quantum ofmateriality this factor would indicate that a matter is likely to be a SignificantConcern.

Further, we believe regulatory definitions of audit inspection findings should bealigned. We note from the consultation paper that The Committee of EuropeanAuditing Oversight Bodies (CEAQB) and the International Forum ofIndependent Audit Regulators (IFIAR) both have different definitions of findingsrelating to individual audits inspected. We believe, in so far as possible, these

Document ctasiflcatLon: KPMS Contdenuel

Irish Auditing & Accounting Supervisory AuthorityThe future publication and grading policy for audit firms that carry out statutory auditsof public-interest entities: Consultation response29 January 2019

definitions should be incorporated into the definitions in IAASA’s rating systemso that it is clear which level of IAASA finding: No Concern; Limited Concern;Less than Significant Concern; Significant Concern, meet the threshold forreporting to CEAOB and IFIAR as an audit inspection finding.

3) Are stakeholders satisfied with the form and content of the proposedaudit quality inspection reports?

While we strongly believe IAASA should follow an anonymous thematic publicreporting model until the new audit inspection regime in Ireland has settleddown for the reasons set out above, if the proposed Framework is to befollowed we agree that the names of the entities whose audits are inspected arenot disclosed. We further note that great care will need to be taken to achieveanonymity given the size of the Irish market and as a result the summarycomments from audits inspected may not be informative to stakeholders.

4) Are stakeholders satisfied with the proposed initial publication of auditquality inspections reports in batches? What are stakeholders’ views inrelation to timing of publication after the initial publications?

While we strongly believe IAASA should follow an anonymous thematic publicreporting model until the new audit inspection regime in Ireland has settleddown for the reasons set out above, we do not support a system of publicreporting on firms as audit inspection reports are completed. Further we believeall public-interest entity audit firms be treated equally and therefore if theproposed Framework is to be followed, then all firms inspected in a calendaryear should be reporting on together in a single batch at the same time in thefollowing year. The timing of the publication of audit inspection reports shouldbe consistent each year.

We hope you find our comments useful. We are committed to contributing to theconstructive implementation of the proposed Framework for the publication and gradingof audit firm inspection reports.

If you would like to discuss any of the above, please contact Daniel O’Donovan ormyself.

Yours sincerely

Eamonn RussellPartner, Department of Professional Practice

Document classificston: KPMG ConMential

Private and confidential

Mr Kevin Prendergast Chief Executive Irish Auditing & Accounting Supervisory Authority Willow House Millennium Business Park, Naas Co Kildare, Ireland

31 January 2019

Consultation Paper - The future of publication and grading policy for audit firms that carry out statutory audits of public-interest entities

Dear Sir

We welcome the opportunity to respond to the above consultation.

PricewaterhouseCoopers is very committed to delivering the highest quality audits which are valued and understood by all stakeholders. Critical to maintaining public confidence in financial reporting is greater transparency over the quality standards we operate to.

We are supportive of the initiatives being proposed by IAASA. International regulators that traditionally have the greatest impact are those that assist firms in analysing inspection findings into categories and encourage the identification of root causes of audit failure.

Equally, it is paramount for investor confidence that the reporting of inspection findings conveys the good quality audit work performed as well as areas for improvement.

We have outlined our responses to the specific questions asked in section four of the consultation paper, together with a summary of our rationale for our responses below.

Question 1

Are stakeholders satisfied with the proposed mechanism of indicating the severity of findings in relation to the effectiveness of the design or implementation ofafirin's quality control system?

We concur that it is important to have a mechanism to indicate the severity of findings in relation to the effectiveness of the design or implementation of a firm's quality control system. However, the definitions of the Red/Amber/Yellow grading in the proposed system are very broad and could be open to substantial interpretation differences. For example it is not clear in the definition of a red grading how the relative importance of a requirement of a standard or firm policy requirement to

PricewaterhouseCoopers, One Spencer Dock, North Wall Quay, Dublin 1, Ireland, I.D.E. Box No. 137 T. +353 (0)1 792 6000, F. +353 (0)1 792 6200, www.pwc.ie

Feargal O'Rourke (Managing Partner - PricewaterhouseCoopers Ireland)

Olwyn Alexander Paul Barrie Brian Bergin Fidelma Boyce Donal Boyle Damian Byrne Pat Candon John Casey Mary Cleary Siobhn Collier Thrèae Cregg Richard Day Fiona de BOrca John Dillon Ronan Doyle John Dunne FCCA Kevin Egan Martin Freyne Alisa Hayden FCCA Olivia Hayden Gareth Hynes Ken Johnson Patricia Johnston Paraic Joyce Andrea Kelly Joanne P. Kelly John Loughlin Gillian Lowth Vincent MacMahon Declan Maunsall Enda McDonagh Shane McDonald John McDonnell Deirdre McGrath Ivan McLoughlin Declan Murphy Damian Naylin Andy O'Callaghan Jonathan O'Connell Aoife O'Connor Denis O'Connor Paul O'Connor Irene O'Keatfe Ger O'Mahoney Padraig Osborne Ken Owens Anthony Reidy Mary Rusne Emma Scott Mike Sullivan Billy Sweetman Paul Tulle

Located at Dublin, Cork, Galway, Kilkenny, Limerick, Waterford and Wexford

Chartered Accountants

PricewaterhouseCoopers is authorised by Chartered Accountants Ireland to carry on investment business.

IL PWC

overall audit quality or independence will be assessed. There is also a risk that where undue emphasis is placed on firm requirements (which in some cases are not consistent across all firms), red findings would not be comparable leading to potential for misinterpretation or confusion when published.

In our view, narrative disclosure of findings using consistent language calibrated across firm inspection reports would enable IAASA to better explain their findings in relation to firm quality control systems as well as the progress of each firm on the quality journey overtime. Consistent language would also facilitate stakeholder assessment of the relative position of each firm.

We note IAASA will assess compliance with the audit firm's own policies and procedures as well as compliance with ISA (Ireland), ISQC 1 (Ireland) and the Ethical Standard for Auditors. In some instances firms will set policies that exceed the requirements of these standards. We would expect the reporting of any deficiencies in areas where firm policy is above and beyond what is required by professional standards would be calibrated so as not to discourage firms setting policy in excess of the requirements.

Question 2 Are stakeholders satisfied with the proposed mechanism of assigning a grade to the individual public-interest entity audits inspected as part of the quality assurance review process?

We agree with the proposed mechanism of assigning a grade to the individual public interest entity audits.

We anticipate that stakeholders may seek to interpolate the overall quality of a firm's PIE audits by reference to these grades. PricewaterhouseCoopers completed 204 EU PIE audits in 2018. We would expect that a representative sample of these audits would be need to be inspected by IAASA prior to being in a position to form any conclusions on firm-wide audit quality. We would expect that the number of audits inspected, as well as any specific criteria driving the selection would be disclosed by JAASA to permit stakeholders assess the findings in an unbiased manner.

Question 3 The proposed audit quality inspection reports will provide a summary of each finding that has arisen in relation to the effectiveness of the design or implementation of a firm's quality control system and will detailL4ASA's recommendationsfor remediation of deficiencies and/or improvements going forward. The proposed audit quality inspection reports will also provide a summary of all public-interest entity audits inspected as part of the quality assurance review, the names of the individual public-interest entity audits inspected will not be disclosed. The proposed audit quality inspection reports will indicate the severity of each ofthefindings that have arisen in relation to the effectiveness of the design or implementation ofthefirm's quality control system and will also disclose the grading that has been assigned to each of the individual public-interest entity audits inspected as part of the quality assurance review. Are stakeholders satisfied with the form and content of the proposed audit quality inspection reports?

We are satisfied with the form and content of the proposed audit quality inspection reports, save for the matters noted in the responses to question one and two above.

Ll

PWC

Question 4 Are stakeholders satisfied with the proposed initial publication of audit quality inspection reports in batches? What are stakeholders'views in relation to timing of publication after the initial publications?

We consider that it is important to the public interest that all firms providing statutory audits of public interest entities be treated similarly. We believe that inspection reports relating to any given year should be published together and should include the reports for all firms inspected during that year.

In relation to the timing of publication after the initial publications, inspection reports should continue to be published together rather than individually. We consider that publishing the reports annually meets the interests of the users of the reports in receiving timely information on all firms at the same time.

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Should you wish to discuss any aspect of this response please feel free to contact Feargal O'Rourke, Ronan Doyle or Mary Cleary.

Yours sincerely

PricewaterhouseCoopers

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