standing for trust and integrity alliott group amsterdam 7 may 2010 eu adoption of isas and other...

Standing for trust and integrity

Alliott Group

Amsterdam7 May 2010

EU Adoption of ISAs and Other Related Matters

Philip JohnsonFEE Deputy President

Standing for trust and integrity2

Agenda

A little about FEE The Accountancy Profession at a Crossroads” Current position within the European Commission ISA Implementation challenges Assurance services other than Audit Impact of the Financial Crisis on Financial Reporting eXtensible Business Reporting Language (XBRL) Ethics and Independence Audit Regulation in Europe Assurance on Corporate Governance Statements Thoughts on the implications for our profession


Federating Member Bodies

43 professional institutes of accountants 32 European countries, including all 27 EU > 500.000 professional accountants


FEE’s Role: Representing the Profession and Adding Value to

Members

Catalyst in Europe


Areas of activity

Company Law Corporate

Governance

Ethics

Auditing

Accounting

Insurance

Banks

Financial Reporting

Sustainability

Qualification and Market

Access

SMEs-SMPs

Public Sector Taxation


“The Accountancy Profession at a

Crossroads”


The accountancy profession at a crossroads

Developments in Corporate Governance

Public Oversight of the

Profession

Helping clients in areas like

SustainabilityExtended use

of XBRL

Changes in Ethics and

Independence

Developments regarding

services other than audit

Changes in financial reporting

Adoption/ Implementation of clarified ISAs

Increasing cross border

activities


Recent messages from the European Commission re

Auditing, Financial Reporting etc.


Recent Messages from the European Commission

Want to reduce burden on SMEs Real difficulty is “how” Recognition that SMEs are fundamentally

important to the economy so need to grow and develop the sector (97% of companies in Europe)

Need to reflect on what changes, if any, are needed



Financial ReportingMicro entities

• Member State option

• Not about eliminating the accounting rules

• Parliament voted for revised proposals – would like to progress during Spanish Presidency

Other SMEs• Revision of 4th and 7th Directive

• IFRS for SMEs

• “Evolution” not “Revolution”



Financial Reporting (cont)Listed SMEs

• Should EC provide different rules?

• Should they have full IFRS or something else?

• What can be done in areas such as Prospectuses and other reports to shareholders?



Auditing Green paper – to be issued before end of

September 2010• Structure of the market (concentration and choice)

• ISA adoption

• Role and governance of the auditors

• Audit for SMEs (do we need to simplify audit for SMEs and SMPs?)

• International co-operation

• Supervision and inspection of audit firms across Europe

• Ethical matters like conflicts of interest

• etc., etc.


Implementation of ISAs

Challenges for the Firms/Profession and

Applicability of ISAs to Audits of SMEs


Main Challenge

Due to current thinking within the European Commission, main challenge will be

Association/Network firms working with different auditing standards unless

direction from the centre or mutual co-operation amongst the constituent firms

within an Association/Network


Countries which have decided to implement Clarified ISAs (April

2010)Countries Status # %

Belgium (2012/2014), Bulgaria, Cyprus, Czech Republic, Finland, Hungary, Ireland, Latvia, Malta, Netherlands, Norway, Slovak Republic, Slovenia, Sweden, UK

Yes 15

52

Austria, France, Luxembourg, Poland, Portugal, Romania, Switzerland

No, awaiting EC

7 24

Denmark, Estonia, Germany, Greece, Italy, Lithuania, Spain

Unclear 7 24

Total 29

100


ISA Implementation Challenges for the Firms/Profession

Need for considerable human and financial investment in first years: Translation of ISAs into local language New or updated audit approach policy manuals

and methodology New or updated audit software New or updated training material and training

efforts Coordination with and buy-in from stakeholders

(preparers, regulators, inspection bodies, software providers, training consortia, professional media, etc.)

Involvement of professional bodies (essential)


Big Audit Firms

Have implemented clarified ISAs by IAASB effective date (2010 year-ends)

Were already largely ISA compliant Can look after themselves for

implementation Issues:

Globally consistent approachLocal pluses and potential minuses (local laws

and regulations)Different approach for different industries and

size of entities


Smaller Audit Firms

Smaller firms need more help as it is a greater challenge for them

Not all countries are starting from the same position re standards currently being used. Much to do in many countries

Issues: Considerable time required to implement (start now) Need help from professional accountancy bodies (FEE

Member Bodies) FEE Member Bodies seek help from IAASB, FEE, etc. IAASB to produce implementation or support material

(video modules and slides for certain ISAs) – will it focus on SMEs


FEE ISA Implementation Task Force

Set up to consider work required on implementation of clarified ISAs in 2010 and beyond

Includes representatives of IFAC SMP Committee, EGIAN, World Bank, etc.

Established current ISA implementation status and approaches across Europe (survey)

Based on the results of the survey, still to determine what further work to be undertaken

on implementation framework on communications

Focusing on sharing information to help FEE Member Bodies and SMPs wherever possible

Considering involvement with audit software providers


Applicability of ISAs for Audits of SMEs (1)

Concerns of SMPs Cost of audit will increase using clarified ISAs Concerns about scope to apply professional

judgement to determine audit approach in line with nature, size, risk and complexity of audited entity

Concerns about excessive audit documentation requirements

Expectations of public oversight bodies (POBs) upon quality assurance reviews or inspections are unclear


Applicability of ISAs for Audits of SMEs (2)

Response: Need to re-engineer the audit to benefit from work on

internal control environment Open debate of FEE with IAASB, POBs, EGAOB and

European Commission on concerns and possible resolution

FEE Policy Statement on ISAs produced IAASB Staff Q&A on proportionality of ISAs in SME

context issued IAASB implementation modules rolled out Update of APB Practice Note 26 on Guidance on Smaller

Entity Audit Documentation completed IFAC SMP Committee Guide on Using ISAs in the audit of

SMEs being reviewed – due end of 2010


36 Clarified ISAs and ISQC 116 revised and redrafted ISAs; 1 new ISARemaining ISAs and ISQC 1 redrafted

Revisions include new requirements and guidance that aim to improve practice in a variety of respects

Redrafts include requirements drawn from existing ‘grey text’

Effective date: 2010 year end audits Moratorium: no new ISAs effective before

2011

Output of the Clarity Project


ISAs

General Principles and

Responsibilities

Risk Assessment and Response to Assessed Risks

Audit Evidence

Using Work of Others

Audit Conclusions

and Reporting

Specialized Areas

ISA 200

ISA 210

ISA 220

ISA 230

ISA 240

ISA 250

ISA 260

ISA 265

ISA 300

ISA 315

ISA 320

ISA 330

ISA 402

ISA 450

ISA 500

ISA 501

ISA 505

ISA 510

ISA 520

ISA 530

ISA 540

ISA 550

ISA 560

ISA 570

ISA 580

ISA 600

ISA 610

ISA 620

ISA 700

ISA 705

ISA 706

ISA 710

ISA 720

ISA 800

ISA 805

ISA 810

16 Revised and Redrafted

19 Redrafted only

1 New

36 Clarified ISAs


Objectives and overarching responsibilities

Risk assessment and evidence gathering in

riskier areas

Quality of audit evidence, and basis for

reliance on othersAuditor communications

ISA 200 – Overall Objectives and Conduct of ISA Audit

ISA 320 - Materiality

ISA 450 – Evaluation of Misstatements

ISA 402 – Service Organizations

ISA 505 – External Confirmations

ISA 540 – Estimates and Fair Values

ISA 550 – Related Parties

ISA 580 – Written Representations

ISA 600 – Group Audits

ISA 620 – Using Work of Experts

ISA 260 – Communication with TCWG

ISA 265 – Communicating Deficiencies in I/C

ISA 705 - Modifications

ISA 706 – EOM/Other Matter Paragraphs

Redrafted and Revised ISAs


Main changes in Clarified ISAs

The split between objectives, requirements and guidance (AM) makes the ISA much clearer

Much more risk-based, so much more focus when performing an audit on understanding the entity, risk assessment and internal controls than would be the case if substantive audit procedures used in all areas

Heightened attention to fraud Use of professional judgement in audit, reporting

and documentation continues to be important Focus on significant matters, risks, judgements

and documentation cannot be stressed enough


There is an opportunity to promote the benefits of the

clarified ISAs

Put related party transactions nearer the heart of the audit

More principles based approach through use of objectives

More rigorous approach to the audit of groups

More robust approach to management override

Relevant to responding to the financial crisis including ISA 450 on evaluation of misstatements

Greater clarity as to what is expected of auditors


Some key messages that have emerged from UK

implementation

Strong resistance to dual track approach

for big and small audits

Recognition that clarified ISAs are

easy to understand

Involvement of engagement partner

is key to audit effectiveness and

efficiency

Too early to gauge success of current

implementation

Enthusiasm needs to be encouraged

Learning providers want to

know why the changes were made and not just what the

changes are

Effective implementation needs sufficient time and effort

The DVDs issued by the IAASB are useful

Need to sell the success of clarified ISAs


Issues that became apparent after 2005 Implementation of Risk ISAs

in UK

Smaller firms need special support

Many firms were struggling with

the risk ISAs

Quality of software is key

Partner engagement is critical

Successful implementation takes

several years

Support software with learningis important


Impact of Use of Audit Exemption Thresholds


Use of Audit Exemptions for Limited Liability Companies in the EU,

Norway and SwitzerlandCountries %

Maximum or near maximum thresholds:Balance sheet total: €4.400.000Net turnover: €8.800.000(Austria, Belgium, Germany, Ireland, Italy, Luxembourg, the Netherlands, Romania, Slovenia, Switzerland1, United Kingdom)

11 38

Balance sheet total: between € 2.500.000 and 3.000.000Net turnover: between € 5.000.000 and 5.700.000(Greece, Poland and Spain)

3 10

Balance sheet total: between € 1.000.000 and 1.800.000Net turnover: between € 2.000.000 and 3.100.000(Czech Republic, France (except SA), Lithuania and Portugal)

3 (1) 10

1 Introduction or increase in 2007, 2008 or 2009


Use of Audit Exemptions for Limited Liability Companies in the EU,

Norway and SwitzerlandCountries %

Balance sheet total: between € 500.000 and 900.000Net turnover: between € 1.000.000 and 1.800.000(Estonia1,4 and Slovak Republic1)

2 8

Balance sheet total: between € 100.000 and 500.000Net turnover: between 200.000 and 1.000.000(Bulgaria, Denmark1,4, Finland2, Hungary1 and Latvia1)

5 17

Balance sheet total/ net turnover: €0 (Cyprus3, France (SA), Norway, Malta3, Sweden4)

5 17

29 100

1 Introduction or increase in 2007, 2008 or 20092 Decrease in 20073 For tax purpose4 Increase in 2010 (final or expected)


Impact of use of Audit Exemption Thresholds

Trend to increase audit exemption thresholds in EU

97% of all EU audits are SME audits The market for statutory audit is shrinking

(95% are below EU audit threshold) Substitution by voluntary audits is not

evident However, the economy continues to need

comfort that the financial performance of companies is fairly presented


Reaction to more companies not requiring

an audit


Assurance services other than audit

Issues: “An audit is an audit”

must be preserved (brand protection)

Increase in audit exemption thresholds

More regulatory pressure Clarified ISA audit more

demanding and more costly

Desire by profession to provide something to fill the hole

………

Responses: Development of / changes to

assurance services other than audit

Addressed on national, FEE & IAASB level

Divergent views in different countries

Desire to arrive at positive audit opinion with less work – not possible without confusion or brand damage

FEE survey July 2009


Assurance initiatives other than audit in some countries

Consideration of or proposals for non audit assurance service for (certain) smaller entities in Denmark, Finland and Malta

Mandatory statutory review for ‘‘SMEs’’ in Estonia and Switzerland

Presentation or compilation engagements with certain assurance in France and Germany

Accountant (not auditor) report for small charities & pension schemes in Ireland

Continous integrated reasonable assurance by Collegio Sindacale in Italy

Limited assurance based on review plus substantive procedures in UK (ICAEW)


Assurance services other than audit: conclusions

Fragmentation a major issue in Europe and beyond if no global standard

Call by FEE for Member States and National Institutes to exercise constraint

IAASB encouraged to speed up work on review engagements- exposure draft late 2010


Impact of the Financial Crisis on Financial

Reporting


Impact of the financial crisis on reporting

Was IFRS to blame or did it identify the problem?

Political pressure to achieve a ‘‘Level Playing Field’’

Revision of Standards accelerated (IAS 39 -> IFRS 9)

Convergence to one single set of global standards called for but slow progress

Regulatory vs financial reporting (dynamic provisioning)

Role of Europe and EC


Changes initiated by ECFourth and Seventh Directives

Member State option to exempt micro-entities

Complete Overhaul of the Fourth and Seventh Directives?

IFRS for SMEs: Debate goes on – EC not clear in its viewLarge differences between Member States on

intended useEuropean Parliament – in the past against it

but what now? A wait and see policy !


eXtensible Business Reporting Language

(XBRL)


eXtensible Business Reporting Language (XBRL)

Allowing or mandating filing of audited FS and / or tax filings under XBRL becomes more and more common

IAASB project proposal to develop Pronouncement on expected auditor work efforts and

implications on his reporting if XBRL data filing with FS or if only XBRL data filed

FEE XBRL Task Force has prepared a FEE Policy Statement to educate the accountancy profession and third parties on the use of XBRL

Explosion in available literature shows increased activity around world

Profession needs to engage now – increased demand for SMP services


Ethics & Independence


Ethics & Independence

Principles: covered in Articles 21 & 22 of SAD EC recommendation on independence (2002)

still applicable Revised IESBA Code of Ethics (July 2009),

effective 1 January 2011, significantly strengthens the independence requirements for PIE audits, non-PIE audits and other assurance services

Changes re key audit partner, partner rotation, internal audit services, tax services, relative size of fees, contingent fees

EU MS currently have wide variety of independence principles and/or requirements based on (old) IFAC code – need for EC Recommendation


Audit Regulation in Europe


Audit Regulation in Europe Basis for European regulation on auditing:

Statutory Audit Directive (SAD) (May 2006) For implementation in EU Member States (MS) by

July 2008 As at 1 February 2010; 2 EU MS had not yet

implemented the SAD: Ireland and Spain They hope to implement in 2010; the European

Commission (EC) has taken them to the European Court of Justice

Norway will implement as well The EC has not yet checked the content of the

national transposition of SAD Significant number of countries are still executing

the changes of the SAD in their MS


EC Recommendation on Quality Assurance

Guidance for implementing independent external quality assurance systems for statutory auditors and audit firms conducting an audit of Public Interest Entities (PIEs)

No detailed guidance for external quality assurance systems for statutory auditors and audit firms auditing entities other than PIEs

Issued 6 May 2008 EU MS inform EC about actions taken Need for mutual recognition of POBs going

forward


EC Recommendation on limitation of liability

Guidance for limitation of civil liability of statutory auditors and audit firms auditing public interest entities

No limitation for intentional breach of duties Limitation against company and third parties Issued 6 June 2008 Important for cross border activities MS inform EC about actions taken by 5 June

2010 No political appetite to move this forward at

present time


EC Decision on Exchange of Working Papers

EC adequacy decision re Article 47 SAD for Canada, Japan and Switzerland, (Australia in pipeline)

Based on cooperation and exchange principle US PCAOB not included Current EC prohibition on US PCAOB access to

EU audit firm or EU MS documents Bill pending in US Congress to change Sarbanes-

Oxley Act to make exchange of documents possible

Mutual reliance between EU POBs & US PCAOB is off agenda at moment

Existence of PCAOB currently being challenged !!


Assurance on Corporate Governance Statements for

Listed Entities


The Auditor and Corporate Governance in European

Legislation

The 4th and 7th EU Accounting Directives (2006/46/EC) were amended in June 2006 Article 46a now requires disclosure of information about

listed company practices in a “corporate governance statement” (CGS) in the annual report or outside the annual report

Role for the statutory auditor depending on whether the CGS is or is not included in the annual report

• Minimum requirement: production check versus consistency check

Measures to be transposed into national legislation by 5 September 2008; a few EU Member States are late !!


Elements CGS

4th & 7th EU Accounting Directives: disclosure of 6 elements in CGS for listed entities:

1. Reference to corporate governance code (CGC) and practices applied

2. CGC: comply or explain approach

3. Description of main features of internal control and risk management system for financial reporting process

4. Take-over bid information (2004/25/EC)

5. Operation shareholder meeting, key powers and description shareholders rights

6. Composition and operation of administrative management and supervisory bodies and their committees


FEE Discussion Paper on Assurance on CGS

Main features:

Outlines key elements of CG codes and legal requirements in Europe;

Summarises main features of existing CG reporting and 2006 EU changes on CGS;

Explains potential auditor involvement with elements CGS as well as required involvement based on IAASB material;

FEE’s views on potential maximum involvement of the auditor with elements of CGS; and

Practical examples of auditors’ assurance reports on their involvement


Examples of Potential Maximum Level of Auditors’ Involvement

CGS example Auditors’ involvement

The Board is effective None

Division of responsibilities between Chairman and CEO

Factual finding based on agreed upon procedures

The Board maintains a sound system of internal control and risk management

Limited assurance

Disclosure of remuneration of individual directors

Reasonable assurance


“The Accountancy Profession at a

Crossroads”


Some messages from the FEE SMP/SME Conference in Venice

There will be more regulation but there is a desire to get it right first time

Profession is changing and our services to SMEs will change

Clients want to pay for expertise and experience

Audit is a diminishing market but other services will stand in its place


Messages from clients (raised at the Venice

conference) Improve your knowledge of the business More focus on the business and less on

figures SMEs want support from SMPs to help

them develop their businesses Wide range of services to be provided not

just audit (but will regulators allow it?) Prepared to pay more for added value

services but not necessarily for audit


The accountancy profession at a crossroads

Developments in Corporate Governance

Public Oversight of the

Profession

Helping clients in areas like

SustainabilityExtended use

of XBRL

Changes in Ethics and

Independence

Developments regarding

services other than audit

Changes in financial reporting

Adoption/ Implementation of clarified ISAs

Increasing cross border

activities


Thoughts on the implications of changes

for the Auditing Profession

Questions that need to be answered if we are to prosper in the future


Implications for the Profession

Will there be convergence of Standards globally – Auditing, Ethical, Financial Reporting? If not, what will be the implications?

How will the Regulators finally react to the Financial Crisis? More regulation or better regulation?

What will the emerging markets of China, India, Russia and Brazil adopt as their Standards and how will this impact on us? Some already moving to IFRS and ISAs

What will be the impact of XBRL be on financial reporting and auditing?

Are we well placed to lead on Sustainability?


Implications for the Profession

In Europe : Will the profession across parts of Europe lose

credibility if ISAs are not adopted by the EC Will we have a two track profession – auditors and non-

auditors and/or large firms and small firms working with different auditing standards ?

How will we train our people (and, as a consequence, those who go into industry and commerce)?

How can we attract and retain the best people?

If, globally, we don’t have an audit for the vast majority of companies what will the market want in its place (if anything) and are we equipped to provide it?


There is a big opportunity (if we seize it)

as well as a big challenge


Discussion and Questions


Standing for trust and integrity

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