theaccountant.orgtheaccountant.org.mt/issues/spring-2014.pdf · a future for the profession: aiming...

p.1SPRING 2014 | theaccountant.ORG.mt

SPRING 2014THEACCOUNTANT.ORG.mt

newspaper post

STUDENTSCarving Your Path to Success: F8 Audit and Assurance

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FEATUREEthics, Trust and Auditing: Conceptiualising a Tripartite Framework

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Global UpdateAudit Policy Reforms

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SPOTLIGHT ON...Aldo Zammit

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FEATUREThe Importance of Planning and Materiality

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FEATURENegotiating and Implementingthe AIFMD: The Malta Experience

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theaccountant.ORG.mtWE ARE NOW ONLINE!

p.2 SPRING 2014 | theaccountant.ORG.mt SPRING 2014 | theaccountant.ORG.mt p.02THE ACCOUNTANT CONTENTS

theaccountant.ORG.mtWE ARE NOW ONLINE!

COVER

Issued QuaterlyThe Accountant is published by

on behalf of The Malta Institute of Accountants

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The Institute does not necessarily concur with the views expressed in the articles published in this journal. Articles are published without responsibility on the part of the publishers or authors for loss occasioned in any person acting or refraining from action as a result of any view expressed therein. “The Accountant” can now be accessed from the website at www.theaccountant.org.mt

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TECHNICAL

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IFRS, IAS, ISA UPDATE

lifestyle

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spotlight on... ALDO ZAMMITby Catherine Malia Bonavia

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the puttinu cares foundation

STUDENTS

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carving your path to success: F8 Audit and Assuranceby Morgan Carabott

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acca studentS’ notice board

news

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MIA NEWS

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global update: ifac, iasb, fee updates

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GLOBAL UPDATE: audit policy reforms

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PRESIDENT’S ADDRESS

SMPs

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sme audits : qau findings, the smp perspective and a simplified audit approachby Mark Abela

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review engagements: a value-adding client service

by Phil Cowperthwaite

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IFAC’s global knowledge gateway

FEATURES

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THE importance of planning and materialityby Massimo Laudato

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a future for the profession: Aiming for PUBLIC TRUST by Mario P. Galea

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the tax treatment of losses under the proposed common consolidated corporate tax base directive

by Jeanette Calleja Borg

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negotiating and implementing the aifmd: the malta experienceby Christopher P. Buttigieg

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ethics, trust and auditing: conceptualising a tripartite frameworkby Michelle Spiteri Bailey

p.3SPRING 2014 | theaccountant.ORG.mtp.03THE ACCOUNTANTPRESIDENT’s AddrESS

PRESIDENT’s AddrESSMaria micallef, mia president

In these past few weeks, a number of important decisions have been taken at EU level, which developments affect our profession at its heart, in particular audit.

The first matter I would like to refer to is the outcome of the plenary vote in European Parliament on 3rd April 2014 which affects the audit sector. The legislation approved is in the form of a Directive and a Regulation. The Directive, which amends the text of the Statutory Audit Directive (2006/43/EC), contains a series of new and amended requirements governing every statutory audit in the European Union whereas the Regulation contains a series of additional requirements that relate only to the statutory audits of PIEs, in addition to the general ones stated in the Directive.

To come into effect, the Directive will need to be transposed by the respective Member States into their national laws in order to become effective law. There is a two year timeframe in this respect. The Regulation on the other hand comes into effect within 20 days from the publication of the Official Journal of the European Union although implementation of certain parts of it may be delayed until the Directive is transposed into national law.

The key elements of the Regulation, among others, include:

• Mandatory firm rotation for PIEs – (Audit firms required to rotate after an engagement period of 10 years. Member states have the option to extend this period by a further maximum period of 10 years, if tenders are issued, and by up to 14 additional years in case of joint audit)

• Restriction on provision of non-audit services to PIE audit clients.

These regulatory reforms, which were the source of many contentions within the profession and business spheres, are significant. They were put forward with the primary objective to better protect and enhance the public interest. Whether this objective will be achieved or whether it will result in some sort of musical chairs amongst the big four one has yet to see. What is certain is that audit firms outside of the big four have to rise to the occasion and prove that they are fit for purpose as no business wants to end up with auditors that do not have the necessary competencies and depth of experience to execute their work well.

The audit reform pronouncements add on to the list of EU regulation that needs to be adopted by the Member States. The Accounting Directive (2013/34/EU) that was approved by the European Parliament in June 2013 and which also needs to be transposed by all Member States is likewise going to effect the local profession perhaps in an even more profound manner. The Directive aims at simplifying the accounting requirements for small companies and improves the clarity and comparability of companies’ financial statements within the Union. Locally a working group has been set up by the Accountancy Board in which our Institute is actively participating, together with MFSA, to ensure a proper and effective transposition.The Directive is based on a ‘think small first’ approach. This approach imposes basic requirements on small companies and / or groups and gradually imposes additional requirements on medium-sized companies and / or groups, with the most onerous requirements being imposed on large companies and / or groups, as well as Public

p.4 SPRING 2014 | theaccountant.ORG.mt

Interest Entities. This approach differs from the current 4th and 7th Directives where the largest company types were the norm, with various derogations and exemptions for small and medium sized companies.

It is not my intention to go into the detail of this Directive. I will leave that to our most capable technical professionals amongst us. I would however like to outline some factors to put things in context and outline how, in my view, these changes could affect our profession and the economy in general.

These changes contemplate a micro-entity regime wherein the entities so classified are not required to prepare elaborate financial statements or to have these audited. It the Member State believes that the micro-entity regime needs to be introduced and opts to adopt all the simplifications that are envisaged by this regime, then the financial statements of those entities that fall within the micro-entity parameters could be prepared to include a simple balance sheet with no notes to the accounts. If the Member State does not opt to have a micro-regime then these entities will automatically fall into the small category, which is one of another three categories (small, medium and large) contemplated in the Accounting Directive. Entities that fall to be categorised as Medium or Large have to prepare financial statements that are more or less along the lines we are used to today. If a Member State chooses to adopt all the simplifications for small entities that are forseen in the Directive then small entities would need to prepare financial statements that could include only an abridged profit and loss account, an abridged balance sheet and certain notes to these financial statements. These financial statements may not need to be audited. In fact Member States have to ‘opt in’ if they require the entities within the small regime to have their financial statements audited. Member States also have practically no say in setting the thresholds for definition of a small entity. One has to apply those set by the EU Directive which has put forward minimum or maximum thresholds that Member States may choose from. Based on information at hand the micro and small categories in Malta would probably include more than 90% of companies registered.

What does all this mean when put in the local context? To my mind a number of main policy decisions are necessary including whether to ‘opt in’ with respect to audit.

Naturally being a matter of policy it is the Government of the day that needs to make the decisions required. It is not my remit or competence to tell Government what to do. Government’s policies in these past years however have always been such as to retain an audit regime as this is considered to be one of the factors that has contributed, amongst other things, to improved fiscal morality and has a positive effect on the collection of government revenues. In fact in interviews made during our past two biennial conferences the view expressed by the then Minister and shadow Minister for Finance was that audits were to stay and if for some reason they had to be removed they would need to be replaced with some other form of assurance.

We as a profession of course maintain that an audit has other benefits and the engagement of an auditor helps to provide a source of professional contact to the SMEs which can prove invaluable. We are also aware that there are categories of owner managed businesses that do complain that the audit is a financial burden for them with little or no value added. Naturally it is important to put matters in context and as a country we should have empirical data to be able to decide just how much of a ‘financial burden’ the audit requirement actually is on these companies. Ours being a competitive environment there is a strong downward pressure on the price of the audit. My personal view is that on average we are possibly talking of an annual audit fee which amounts to a few hundred Euros. The financial saving would be even less if the audit is replaced by a review or some other form of assurance. Careful consideration should be had to see if these potential savings are such as to outweigh other negative effects that may come about with the removal of the audit.

There is the risk of course that the quality of unaudited financial statements and reporting as proposed for the micro and small groups will deteriorate over time. This should be of concern not only to accountants but to capital and credit providers including banks and suppliers.

The European business environment is not homogenous. Mediterranean cultures are very different in some respects to Northern European cultures and this is amply manifest when it comes to fiscal morality and related considerations. There could be a problem with a ‘one size fits all’ approach and we as a country would do well to assess this risk.

As an Institute besides participating in the transposition exercise we are also organising meetings to obtain clarity from Government and related state bodies on the policies that will underpin Malta’s adoption of the Directive. It is our intention to put forward our members’ views and reservations on these matters.

There is no denying the fact that the removal of the audit to potentially more than 90% of local companies will in my view have a negative effect on a number of different fronts, not least our profession – in our case the effect i am talking about is not so much from a financial perspective (as I am sure we will be able to provide other related services) but more from a competencies perspective in that the audit competence which today is widespread in the profession, as it is found in large and small audit service providers, will in future be less so. As a country we will run the risk that smaller accounting firms will be scaling back their investment in audit service as this will no longer be tenable.

I also think however that matters have come to a point where we as a profession should have the courage to question ourselves, especially at times such as this where there are new developments in accounting and audit policies. As FEE (European Federation of Accountants) so aptly puts it we can ignore these developments, resist calls for change and run the risk of becoming less relevant to the different stakeholders or alternatively we can embrace change and place ourselves at the forefront in proposing new ideas.

Indeed, in its paper ‘The Future of Audit and Assurance’, FEE puts forward a number of discussion points for consideration and as an Institute we will be making our own submissions to FEE on these points. I strongly urge our members to read this paper and put forward their views which we will take into consideration when preparing our submission.

There are some in the business community who maintain that we have a vested interest to keep the status quo with regard to accounting and auditing. May I remind one and all however that a distinguishing feature of our profession, indeed its hallmark, has always been recognition of our responsibility to act in the public interest. We have never upheld our positions at the expense of the public good and we will not do so now.

As a country we should think long term and make a holistic consideration of the effects potential changes in accounting and audit will have on various different sectors including: on the local company cost make up, on Government revenue collection, on the accounting profession, on the different users of the financial statements, on the financial services sector, on the fiscal regime and thus related foreign investment. We should carry out the necessary empirical studies to be able to make informed rather than ‘gut feeling’ decisions as the ramifications are considerable.

We need to do our homework well so that 10 years down the line Malta will not regret any changes made as it would be very difficult, indeed neigh impossible, to turn the clock back and reverse the overall negative consequences that could result.

p.04THE ACCOUNTANT PRESIDENT’S ADDRESS

SPRING 2014 | theaccountant.ORG.mt

p.5SPRING 2014 | theaccountant.ORG.mtp.05THE ACCOUNTANTNEWS

MIA NEWS MAY SMP FORUM SAVE THE DATE

On Friday 23 May, the MIA’s Small and Medium Sized Practices Advisory Committee (MIA SMP Committee) will be organising its fifth annual SMP Forum. This year’s event will be spread over a full-day and will be held at the Westin hotel. A wide array of speakers will be covering a range of topics which are of great interest to SMPs. The event will be sub-divided into five sessions, which will include a mix of breakout sessions, panel discussions and presentations. Topics include company liquidations, audit reporting, IT developments, HR matters, prevention of money laundering and EU funded projects. The event will include a buffet lunch and two coffee intervals. Members will benefit from a discounted price of €75 if they reserve a seat by close of business Monday 5 May. Thereafter the price will be €90.

JUNE MIA SOCIAL EVENT SAVE THE DATE

The annual social event for MIA members will be held on Thursday 5 June at the Intercontinental Hotel. MIA members are invited to enjoy an evening in a relaxed and casual environment on the roof top of one of Malta’s leading hotels. Food will include a lavish barbeque buffet and sushi, accompanied by free flowing wine and water. A raffle will be held, the proceeds of which will go to charity. Attendees will be encouraged to participate in a karaoke session, which besides promising to be the highlight of the night, will also offer prizes for the first, second and third classified singers!! Attendance to the summer barbeque is limited to MIA members since all costs will be borne by the Institute.

JULY MIA AGM SAVE THE DATE

The annual general meeting of the Institute will be held on Thursday 3 July 2014. Members who wish to be nominated for election to the Council are kindly requested to inform the Secretary General, in writing, by not later than Friday 31 May 2014. Any Member who wishes to bring before the Annual General Meeting any motion not related to the ordinary annual business, but relating to matters affecting the Institute or the Accountancy Profession as laid down in Bye-law 5.04 of the Statute, are to remit any such motion to be received by the Secretary General by not later than Friday 31 May 2014.

SPEAKING AT MIA ORGANISED EVENTS

Individuals who are interested in participating as speakers at MIA organised events are encouraged to express their interest by accessing the ‘Become a Speaker’ webpage on the Institute’s website and following the on screen instructions. Preference will be given to individuals who are experts in a subject matter that is of interest to the

Accountancy Profession and who have the required public speaking and presentation skills. These individuals will be contacted by the MIA’s CPE Officer, Ms Catherine Mallia Bonavia.

NEW FINANCE OFFICER FOR THE MIA

The MIA is pleased to announce the recruitment of Ms Maria Cauchi Delia as its new Finance Officer. Maria is a Certified Public Accountant and a registered auditor. She graduated from the University of Malta with a Bachelor of Accountancy (Honours) degree, in 2001. She has worked with KPMG and Ernst & Young, both locally and abroad as well as held finance related managerial positions within the private and public sector. She is a fellow of the Malta Institute of Accountants. Ms Cauchi Delia succeeds Mr Julian Borg.

MIA MEMBERS and upgrades

AIAMs. Nadine Farrugia

MIAMr. Joseph Mary BezzinaMr. Mark GiorgioMr. Marvin ZammitMr. Michael BianchiMr. Omar SchembriMs. Joanna SpiteriMs. Lara BrincauMs. Sarah CamilleriMs. Sarah-Anne Debattista

MIA UpgradesMr. Aaron BugejaMr. Elvio BarbaraMr. Gabriele BrincatMr. Ian CoppiniMr. Joseph SaidMs. Amanda FormosaMs. Antoinette ScerriMs. Dorianne CriminaleMs. Graziella VellaMs. Jessica-Marie StivalaMs. Maria DimechMs. Marina VellaMs. Nadine ButtigiegMs. Roberta Galea

SPRING 2014 | theaccountant.ORG.mtp.06THE ACCOUNTANTNEWS

ONLINEtheaccountant.ORG.mt

It is with great pleasure that the Malta Institute of Accountants announces an exciting new development for all the readers of the Accountant: the Accountant online portal.

This portal is an easily accessible hub for aggregating news, articles, and views from the Malta Institute of Accountants periodical journal, the Accountant. This portal will help Accountants find relevant results and will provide a platform for local knowledge sharing and a venue for users to learn, discuss, and engage on a variety

of timely and topical subjects.

The website makes use of the latest web design methodology and has all the attributes for providing users with one of the best interactive experiences that are available for periodic publications.

SOME OF THE FEATURES

Readers can save or print individual articles.

Articles are grouped by category such that readers can easily display an archive for example all technical articles or all SMP

articles.

As we build our new archive, you’ll find an increasing number of searchable articles from where users can easily filter resources by issue, subject, author or keyword.

The portal makes use of the last social media functionality which enables readers to share articles with their followers on twitter, with friends on Facebook or by email.

MIA members or non-members are able to submit an article for the consideration of the editor or indicate their interest to be covered

in the spot-light on…

We hope you find the information on this website to be relevant, timely and useful to you.


THE ACCOUNTANTNEWS

The Individual Investor Programme LOCAL UPDATE

The Individual Investor Programme of the Republic of Malta (IIP), enacted by virtue of Legal Notice 47 of 2014, allows for the granting of citizenship by a certificate of naturalisation to individuals and their families who contribute to the economic and social development of Malta.

Subject to a stringent vetting and diligence process, including thorough background checks, the applicants and their dependents are granted citizenship in exchange for such contribution. By virtue of Legal Notice 47 of 2014, the Government of Malta has established the legal framework for the IIP, which is managed by the Identity Malta Agency. The process of application for the IIP is carried out through a Concessionaire, Accredited Persons or Approved Agents.

Who can apply for citizenship?

To qualify for citizenship, the main applicant must be at least 18 years of age, provide proof of having been a resident of Malta for a period of 12 months preceding the issuing of a certificate of naturalisation and meet the following investment requirements:

• *The acquisition of real estate with a minimum value of EUR 350,000 to be held for at least 5 years; or

• *Lease a residential immovable property in Malta for a period of 5 years, at an annual rent of at least EUR 16,000; and

• Make a contribution to the National Development and Social Fund

• An investment in stocks, bonds or special purpose vehicles to be identified by Identity Malta, for a minimum value of EUR 150,000 to be held for a minimum period of 5 years.

*Immovable property cannot be let or sublet.

Applicants must have a Global Health Insurance coverage for at least EUR 50,000 for the main applicant and each of the dependants and must give proof that they can maintain the same for an indefinite period.

Principal Applicants can include in their IIP application:

• Spouse – in a monogamous marriage or in another relationship having the same or similar status to marriage.

• Dependents of 18 years of age and under.

• Dependents between the age of 18 and 26 years of age, who are not married and who are wholly supported by the main applicant and form part of the household.

• Dependents over the age of 55 years (e.g. parents), who are wholly supported by and who form part of the household of the main applicant.

The following contributions and fees shall be required as a minimum to qualify for citizenship under the IIP:

Licensing Fees

• Application Fee for Agent License • Renewal Fee payable annually • Reduced Renewal Fee for Approved Agents

Contributions• Principal applicant • Spouse • Each Dependent child aged

0-17 • Each Dependent child aged 18-26 • Each Dependent aged 55 or above

Fees• Principal applicant • Spouse • Each Dependent child aged 0-17 • Each Dependent child aged 18-26 • Each Dependent aged 55 or above

Per personPer application

€650,00025,000

25,00050,00050,000 7,5005,0003,0005,0005,000500200

€

1,5001,5001,000

Who can apply to become an Accredited Person and/or Agent?

Any individual who is either personally an Authorised Registered Mandatory (ARM) or who is a Director or Employee of a Body Corporate that is itself an Authorised Registered Mandatory approved by the International Tax Unit of the Inland Revenue Department.

License holders must be resident in Malta and Professional Indemnity Cover of €1,000,000 must be held in their sole name and/or in the name of their employer and/or corporate entity. Written confirmation must be provided from the insurer that endorses/confirms that business undertaken under the IIP is specifically covered.

The applicant must be in possession of a recognised professional qualification, for example ACIB, ACCA, CII, CTLA, STEP. He must attend a mandatory briefing workshop organised by Identity Malta. The applicant must also provide evidence of access to and the use of an online due diligence database to be used to verify that their prospective applicants have no issues of concern with their personal background, for example World Check, Dow Jones, GB Group, Northdore, which evidence must be supported by a signed document.

Accredited Agents shall be those who will have satisfied all the Licensing Requirements and attended the briefing workshop. Once certified as Accredited Agents, these individuals may present full MIIP applications on behalf of potential applicants. Approved Agents are those individuals who in the 12 month period from their accreditation manage to present three successful applications.

Applications must be accompanied by supporting identification and verification documents authenticated in English, as set out in the Checklist and Guidelines, together with:

• Police conduct certificates;

• Proof that the main applicant has been a resident of Malta for a period of 12 months preceding naturalisation;

• Medical certificates stating that the applicant and his dependents are not suffering from contagious diseases and are in good health; and

• An affidavit of support for each dependent who is over 18 years of age.

All applicants aged 18 years and over are obliged to attend in person in Malta to undertake the Oath of Allegiance. The process takes between 6 to 24 months and currently the programme is capped at 1,800 main applicants.

About Identity Malta

Identity Malta Agency was established by virtue of Legal Notice L.N. 269 of 2013 of the PUBLIC ADMINISTRATION ACT (CAP.497). By virtue of this Legal Notice, Identity Malta shall carry out functions and duties of the public administration in the following matters:(a) citizenship, residence permits, work permits and other administrative matters related to expatriates;(b) passports;(c) identity cards and other identity documents;(d) acts of civil status;(e) land registration and registration of public deeds;(f) individual investment programmes for expatriates or for persons who acquire Maltese citizenship, including the administration of funds deriving from such programmes.

Identity Malta can be contacted at Mediterranean Conference Centre, Triq l-Isptar, Valletta, VLT1645, Malta. Tel: +356 2122 5232 [email protected] | www. identitymalta.com


LOCAL UPDATE

A FIRST FOR MALTA AS 3A GLOBAL IS LAUNCHED

3a is the first locally founded accountancy firm in Malta to branch out overseas.

Dr Chris Cardona, Minister for the Economy, Investment and Small Business, officiated this launch of 3a Global as a brand, which coincided with the agreement between the company and its first foreign affiliate, 3a Cyprus. Senior representatives from this country attended 3a Global’s official inauguration which took place on 8th November at the company’s headquarters.

George Georgiou, Director of 3a Cyprus, spoke highly of the advantages this membership will offer and said that “Being a member of the 3a Global network has provided our office in Cyprus with access to markets and clients worldwide that recognise the value of quality services. In collaboration with an international network of professional accountants we can demonstrate the strategic and tax-optimising opportunities available to our clients. Utilising the 3a Global network tools and shared resources such as the online Knowledge Base and the Quality Management System, we can offer fresh and unique solutions that add value to our local and international clients.”

The company has gone quite a long way since its inception in 2008. Led by Neville Cutajar, the firm has grown rapidly and attracted high-ranking local partners, including Lawrence Zammit, Joseph FX Zahra and Franco Azzopardi. The company nowadays provides a wide range of services to a diverse portfolio of local and foreign clients.

3a Global was launched after logistical planning and the investment in state-of-the-art information systems set to facilitate the smooth running of a business & professional exchanges between teams operating across multiple regions. The Global operation was instituted as a fully-fledged association, legally set up and registered in Malta, to act as the coordinator of 3a’s international professional services network.

3a Global members will benefit from cross-border facilities such as intra-companies IT infrastructure, granting privileged access to network resources (and potentially clients) geared to help members meet increasing service demands within the international business context. In parallel, clients of 3a Global will benefit from a multinational, best-of-breed HR team and a range of services including assurance, accounting, advisory, trust/fiduciary, international taxation, and corporate services.

NEXIA BT WELCOMES NEW PARTNER, ANITA ALOISIO TO LEAD THE ADVISORY SERVICES ARM

Nexia BT has appointed Reform Finance and Operational Specialist Anita Aloisio, B.A. (Hons) Accountancy, CPA, EMBA (Edin. Paris), FIA, as a new partner with the firm, with effect from 1st January 2014.

In 2010, Anita joined Nexia BT with the specific remit to set-up the firm’s advisory services division. She has made a significant contribution to the firm over the last four years with her direct involvement in managing various large-scale projects, including a number of operational and financial restructuring exercises. She has been integral in the co-ordination of various business partners to compile business plans for obtaining substantial financing, and has also achieved a success rate of 90%+ in assisting clients to secure EU funding.

In his statement to the firm, Nexia BT Managing Partner, Brian Tonna, described Anita as “a catalyst for change”. He expressed his belief that Anita’s extensive knowledge in understanding business complexities and her significant hands-on experience, business acumen and in-depth insight on operational and organisational matters will add even greater value to clients’ businesses, especially those that are experiencing growth or need to transform their systems to remain effective in a dynamic business world.

A CIMA prize winner for the best dissertation in Management Accounting, she brings more than 18 years of experience in cost modelling, project management, the development and implementation of strategic management systems, and business planning. Anita is also a part-time visiting lecturer at the University of Malta. Prior to joining Nexia BT, Anita held a number of senior management positions in the public sector.

THE ACCOUNTANT NEWS


THE ACCOUNTANTNEWS

DELOITTE BRIGHTSTART 2014 RECRUITMENT EVENTDeloitte’s annual BrightStart recruitment event took place on Saturday 5 April at the Deloitte offices in Mriehel. The event was inaugurated by the Hon. Minister Evarist Bartolo, Minister of Education and Employment who commended the organisation of such events which are important since they help bridge the gap between the education and employment worlds. The Minister also spoke of the importance of having the right work ethic and cautioned students “It’s not just about skills, it’s a question of integrity, of honesty; it’s a question of being dedicated, being loyal” said Hon. Bartolo.

During this event Deloitte’s foyer was transformed into an information centre, buzzing with activity as students explored Deloitte’s programmes for tertiary education in professional services. Deloitte directors and staff shared their experiences with the students and discussed their plans for the future. Malcolm Booker, CEO of Deloitte encouraged students to be the best they can be and to share in Deloitte’s vision of a high standard of excellence and in turn Deloitte will give students “the best, the most prosperous future”.

Students attending BrightStart would typically have accomplished their secondary education and are considering the various options

available to them, as well as University students and graduates who already possess a first degree and are now planning to further their studies. The Deloitte Programmes for tertiary education in professional services offer various opportunities to those wishing to pursue a career in the financial sector or any related area of business. There are a range of different options enabling students to choose whether they would rather work full-time and study part-time or vice versa, or a mix of both.

• Deloitte’s Pathway programme is targeted specifically at University students majoring in a degree in Accounts in the Faculty of Economics, Management and Accountancy whilst Deloitte’s LLB and LLD programmes are targeted at Law students with an interest in taxation.

• Deloitte’s ACA programme allows students to concentrate on their studies for most of the year whilst the Deloitte ACCA programmes enable students to balance work with study with the support of Deloitte.

• Deloitte’s educational programmes support students and graduates to ensure that Malta’s next generation of business leaders will be provided with a dynamic and rewarding career path.

p.10 SPRING 2014 | theaccountant.ORG.mt p.10THE ACCOUNTANT NEWS

Company Service Providers LOCAL UPDATE

The Company Service Providers (CSP) Act, 2013 has been published on the 24th December, 2013 and is now in force. Persons who prior to 24 December 2013 were carrying out the services of a CSP had to apply to the Malta Financial Services Authority (MFSA) for registration in terms of the Company Service Providers Act or to notify the Financial Intelligence Analysis Unit (FIAU).

MIA members who are in possession of a warrant to practice the profession of accountant (issued in terms of Article 4 of the Accountancy Profession Act, 1979) are not required to register with the MFSA but are only expected to notify the Financial Intelligence Analysis Unit (FIAU), in terms of Article 3(1) of the Company Services Providers Act that they are carrying out company services by way of business. This exemption from registration also applies to accountancy and audit firms that are formed in terms of Article 10 of the Accountancy Profession Act.

A CSP, which is a distinct legal person and is directly or ultimately fully owned by warrant holders should be registered with the MFSA under the CSP Act. Similarly those members that are warrant holders and who are either a shareholder, director, manager, MLRO or compliance officer in the company that provides company services are subject to the obligations imposed by the CSP Act and Rules. Corporate company services providers are also precluded from applying GAPSE (General Accounting Principles for Smaller Entities). If licenced, such an entity would become one which is in possession of a licence issued by the MFSA acting as the competent authority in terms of the relevant legislation (in accordance with Regulation 5 of the GAPSE Regulations) and would be precluded from applying GAPSE if it previously satisfied the size criteria that allowed it to apply GAPSE. Similarly newly formed companies that could otherwise fall in scope of GAPSE would not be able to apply it.

On 14 March 2014, the Malta Institute of Accountants organised an information session for its Members about the CSP Act and Regulations. Members can access the slides that were used by MFSA representatives as well as a document with a number of case studies, by going to the web page > MIA Event: Introducing the Company Service Providers Regime under the library Events that is only accessible by MIA members after login. For ease of reference these case studies are shown below.

1. If a CSP Co LTD subcontracts all its work to a warrant holder, but then invoices the client itself, would it need to register with the MFSA? Would the warrant holder need to notify the FIAU?

This appears to be an outsourcing arrangement and accordingly, the CSP Co. Ltd, would need to be registered in terms of the Act and take responsibility for the work subcontracted. The warrant holder would be required to notify the FIAU.

2. If a CSP Co LTD needs to apply for an MFSA licence and a warrant holder is either a shareholder, director, manager, MLRO or compliance officer in the CSP, would he need to satisfy the fit and proper test? Does an individual need to fill in a personal questionnaire in all cases?

Shareholders, Directors and persons holding a senior management position are all subject to the “fit and proper” test and must submit an individual PQ. Where the proposed person has within the previous five years submitted a PQ to the MFSA in connection with some other role with the same or another regulated company, the request for consent need not be accompanied by a new PQ. In these circumstances, it shall be accompanied by a confirmation by the proposed person that the information in the previous PQ is still current or indicate any changes or updates thereto.

3. Company A is a firm of accountants / auditors (that may be set up as a partnership or as a limited liability company in terms of the Accountancy Profession Act - APA). Companies B & C are owned by the same individuals who are partners in the firm and that fall within the definition of a CSP. Companies B and C form part of the same group as Company A and for the purposes of the APA can be considered as Connected Undertakings. Since Company A is exempt and Companies B and C are connected undertakings, would they also be exempt or must these companies obtain a licence from the MFSA to act as CSPs?

If Company A is set in terms of the Article 10 of the APA, it is exempt from registration in terms of the Act but must notify the FIAU. Companies B and C are still required to be registered in terms of the CSP Act because they are separate legal entities from both Company A and from its shareholders.

4. Assume that an accountancy / audit firm is providing company services in its own name and therefore is required to notify the FIAU. Would each partner in the firm also be required to notify the FIAU in his own name?

No, unless such partners are also providing company services in their own name as well as in the name of the audit/accountancy firm. Accordingly, it is only in the latter case that the partners would need to notify FIAU independently of the audit firm.

5. Company A is part of Group C. The company is an employment agency, which as part of its day-to-day operations provides employers with company directors or company secretaries both on a permanent as well as on a temporary basis. Would Company A would fall in scope of the Company Service Providers Regime?

Yes. The services offered by Company A by way of business include “arranging for another person to act as director or secretary of a company” which attract a registration requirement in terms of the CSP Act.

6. What actions would I need to take in the following circumstances:

• I am a warrant holder and I sit on company boards as a director or company secretary.

If these activities are carried out by way of business you are exempt from Registration because you are a warrant holder, but must notify the FIAU.

• I am not a warrant holder and I sit on company boards as a director or company secretary.

If you carry out these activities by way of business, you are subject to Registration.

• I am a company director or a company secretary for the company that I own or for the company that employs me. Should I also include these directorship/s for the purpose of calculating the total number of directorships?

If these are the only directorships / company secretarial positions you hold there is no need for registration or to submit a notification to the FIAU. These directorships should not be included for the purpose of calculating the total number of directorships

• I provide company services to businesses by forwarding their mail and/ or I operate a business that provides a registered company officeservice.

You are subject to registration in terms of the Company Services Providers Act.



THE ACCOUNTANTFEATURE

Audit Planning

Audit planning is one of the areas which causes disagreement amongst auditors. Some see it as a burden others as a way to a more efficient and effective audit. The essential elements of a time saving risk based approach are discussed below.

Objectives of an audit and risk-based approach

When conducting an audit engagement the auditor should bear in mind what the overall objectives of his/her work are, i.e. to obtain reasonable assurance as to whether the financial statements are free from material misstatement, which may arise from fraud or error, so that he/she can express an opinion on whether the financial statements are prepared in accordance with the adopted financial reporting framework and report accordingly.

To obtain reasonable assurance the International Standards on Auditing (ISAs) require the auditor to obtain sufficient appropriate audit evidence to reduce the risk of giving an inappropriate audit opinion when the financial statements are materially misstated, in this way allowing the auditor to draw reasonable conclusions on which to base his/her audit opinion. Under the ISAs an effective audit should be performed by adopting a risk-based approach that seeks to identify and assess specific risks of material misstatement concerning the financial statements of an entity and addresses them with audit procedures designed to result in audit evidence that is sufficient, relevant and reliable.

A risk-based approach to auditing involves assessing the risks of material misstatement, which may be inherent to the entity or its environment. For example technological developments might make a particular product obsolete causing inventory to be more susceptible to overstatement. The greater the risk of material misstatement estimated by the auditor in respect of an item in the financial statements, the more persuasive the audit evidence needed and extensive the audit procedures required to detect it. On the other hand, in respect of items that are less expected to be at risk of material misstatement the auditor may apply less effort in terms of procedures and evidence.

Planning

Planning is the bedrock of the audit. In the performance of a risk-based audit adequate planning is of paramount importance as it allows to direct the audit effort towards the areas expected to be most at risk of material misstatement. Additionally, adequate planning helps identifying and resolving problems on a timely basis and allows the auditor to organise the engagement, including selecting suitably experienced team members to deal with specific risks, so that it can be performed in an effective and efficient manner.

In planning an audit of financial statements the auditor should bear in mind the requirements and guidance of the most relevant ISAs for such purpose:

• ISA 300 ‘Planning an Audit of Financial Statements’

• ISA 315 ‘Identifying and assessing the risks of material misstatement through understanding the entity and its environment’ and

• ISA 330 ‘The auditor’s responses to assessed risks’.

ISA 300 in particular requires setting out an overall audit strategy and a detailed audit plan. The overall audit strategy should indicate the scope of the work, the resources to be allocated to specific high risk areas in terms of experienced staff or hours and the timing of the work. A more detailed audit plan follows on from the approach identified in the audit strategy and indicates the audit procedures to be performed in respect of specific items in the financial statements and their timing.

The audit strategy and the audit plan are not necessarily separate documents or processes as they are strictly inter-related. For example the results of initial risk assessment procedures, like the entity’s business risk assessment or the assessment of internal control, will inform the planning for further audit procedures and, vice versa, the outcome of detailed audit procedures may be so different from what expected at the time of planning to require a modification of the audit strategy and audit plan. As such the audit strategy and detailed audit plan are not necessarily developed in sequence in view of their interaction.

After obtaining a business study degree from the University of East London, Massimo qualified as ACCA in a medium sized accountancy firm in London’s West End, where he later became a manager for a large and varied portfolio of clients. A Fellow of ACCA, Massimo spent 6 years in public practice, specialising in audit and business advice, before joining ACCA where he has worked for nearly 7 years.

Massimo joined ACCA as a technical adviser in 2007 where his work has mainly been focused on the areas of auditing and financial reporting. Alongside providing advice to finance professionals on a range of issues, including audit, financial reporting, business advice, taxation, company and business law, ethics, export and access to finance, Massimo also leads on ACCA’s Audit Programs.

BY Massimo Laudato FCCA

FEATUREThe importance of planning and materiality


In the case of the audit of a small entity, which in many cases involves the engagement partner, who may be a sole practitioner, and just a member of staff, or no other staff at all, establishing the overall audit strategy should not be a complex or time consuming exercise, as it should be proportionate to the size and complexity of the entity. It should save the Auditor time and result in a more efficient audit. A brief memorandum prepared at the completion of the previous audit, based on a review of the working papers and highlighting issues identified in the audit just completed, and updated in the current period following discussions with the owner-manager, can serve as the documented audit strategy. In respect of the audit plan for a small entity, standard audit programmes and checklists may be used, normally prepared on the basis the entity has in place limited internal control, but bearing in mind that they need to be tailored to the circumstances of the engagement in order to specify audit procedures that effectively address the assessed risks.

Identification and assessment of risks

Albeit planning for the audit of a small entity may be less complex and structured it still needs to be based on the identification and assessment of risks of material misstatement to which the entity is exposed.

ISA 315 deals with this aspect by requiring the auditor to identify risks during the process of obtaining an understanding of the entity and its environment and to assess the potential impact of such risks on the financial statements as a whole and on specific assertions.

It is important to point out that the process of identifying risks should start from developing knowledge of the nature, characteristics and dynamics of the entity and of the environment in which it operates and then move to the assessment of the potential effect in terms of misstatement that such risks could have on the financial statements, rather than going in the opposite direction of starting to assess risk by reading the financial statements, which could result in missing relevant and pervasive risks relating to the entity’s industry or its specific circumstances.

For such purpose the auditor should obtain, among other things, an understanding of the following:

a) The factors at play in the industry sector in which the entity operates, like market size, level of competition, supplier and customer relationships;

b) Regulatory factors such as significant laws and regulations, which could be general or industry specific, like environmental requirements specific to an industry, general employment legislation, health and safety regulations and the applicable financial reporting framework;

c) Relevant external factors affecting the entity like the general economic conditions, interest rates and the availability of finance;

d) The nature and history of the entity, including its operations, revenue sources, products, services, markets served, key personnel, locations, ownership structure, business investments underway or planned, key customers, key suppliers and its financing structure;

e) The selection, application and appropriateness of the accounting policies used by the entity and reasons for any changes;

f) Objectives and strategies of the entity and related business risks;

g) The measurement and review of the entity’s financial performance.

Another important element of the entity that the auditor needs to obtain an understanding of, in order to identify possible sources of risk, is internal control, or the system of controls put in place by the entity to ensure reliability of financial reporting, effectiveness and efficiency of its operations and compliance with applicable laws and regulations.

In developing an understanding of controls relevant to the audit, the auditor needs to evaluate whether the design of specific controls is capable of effectively preventing, or detecting and correcting,

material misstatements in respect of identified risks. Additionally the auditor needs to verify whether the controls have been implemented and operate effectively. For such purpose inquiry of personnel is not sufficient and the auditor may need to observe the application of the controls and/or trace transactions through the information system.

ISA 315 identifies five components of internal control:

a) The control environment;b) The entity’s risk assessment process;c) The information system, including business processes, relevant to financial reporting;d) Control activities relevant to the audit, ande) Monitoring of controls

Although all components of internal control can be relevant to the audit, the control environment, intended as the culture created and fostered by management in respect of integrity, ethics, attitude towards control, commitment to employee competence, communication of values, risk management, assignment of authority and responsibility, can be seen as the foundation that determines the strength of other components of internal control.

The nature of the control environment is pervasive to the whole entity and it affects positively or negatively the effectiveness of other controls that are applied to the entity’s transactions. In fact deficiencies in the control environment undermine other controls, even if properly designed, as override can happen more easily, while a positive control environment is conducive to a stronger internal control. It is therefore important to obtain an understanding of the control environment in most or all engagements, especially in respect of smaller entities where controls tend to be informal, by conducting inquiries of management and employees and inspecting documents like statement of internal policies to observe their application.

In respect of the audit of a small entity, it is likely that some components of internal control may not be formally established. The entity is unlikely to have in place a risk assessment process as the management will probably identify risks by their direct involvement in the business. In such a case the auditor will still need to inquire about identified risks and how management addresses them. Similarly information systems and related business processes are likely to be less sophisticated in smaller entities and should be easier to understand for the auditor.

In respect of control activities relevant to the audit, i.e. the policies and procedures aimed at the application of management directives, such as the authorisation procedures for purchases or credit on sales, the segregation of specific duties or the review of the entity’s performance, it may be the case that some of them may not be relevant to small entities. That may happen because management may have sole authority for, say, granting credit to customers and approving significant purchases and therefore have direct control over the most important balances and transactions so that more detailed policies and procedures may not be needed.

In order to identify and assess risks of material misstatement at the financial statements level and at the assertion level for classes of transactions, account balances and disclosures, the auditor gathers information whilst obtaining an understanding of the entity and its environment, including its internal control, which is used as evidence for the risk assessment. The risks identified during such process, including relevant controls relating to them, are assessed to evaluate whether they relate pervasively to the financial statements as a whole and can affect many assertions. The risks identified are also assessed by taking into account relevant controls that may prevent, or detect and correct, material misstatement in specific assertions.

As part of the risk assessment procedures the auditor needs to determine whether the risks identified constitute significant risks that require special consideration. Significant risks often relate to transactions that are unusual, due to size or nature, or that involve judgemental matters.

The outcome of the risk assessment procedures determines the nature, timing, and extent of further audit procedures to be performed in respect of the risks identified.




The information gathered and the knowledge acquired by the auditor in respect of the entity, its environment and controls, as well as the risks of material misstatement resulting from the assessment procedures, are best documented in the permanent section of the audit file. The information recorded will be in fact of permanent interest in respect of the client and, as long as it is being reviewed and appropriately updated or confirmed year on year, it will be the basis for future audits of the entity, as it will feed through to the current section of the audit file and enable the planning of further audit procedures, both in terms of overall audit strategy and detailed audit plan.

The documentation of the auditor’s understanding of the entity, its controls and related risk assessment may be recorded in various ways, including free-form notes. However the use of the schedules and checklists of an audit programme may be useful in indicating specific factors, controls and aspects of the entity’s operations that would normally be relevant to an audit. Additionally such programmes may prompt consideration of risks particularly relevant to the entity’s circumstances.

Some schedules commonly found in audit programmes, like a register of significant laws and regulations, a list of related parties, a business risk assessment, controls checklists and systems diagrams, are of relevance for such purposes. As already mentioned, when auditing a small entity some controls or systems may not be formalised and therefore the relevant schedules and checklists will need to be tailored, and scaled down if necessary, to reflect the way that the entity actually operates.

A recent report, Audit Quality - Thematic review into auditors’ identification of and response to fraud risks, and their consideration of compliance with laws and regulations by audited entities is aimed at auditors and audit committees and suggests a number of areas where audit quality should be considered and “enhanced”.

Responses to assessed risks

The knowledge of the entity and its environment and the risks resulting from the assessment procedures are the basis for the planning of further audit procedures.

ISA 330 requires the auditor to design and implement overall responses to address the risks of material misstatement at the financial statement level and further audit procedures that are responsive to the assessed risks of material misstatement at the assertion level, so that sufficient appropriate evidence can be obtained in respect of those risks. Such responses are embodied in the overall audit strategy and in the detailed audit plan.

As already mentioned, the audit strategy indicates the key decisions in terms of scope, timing and direction of the audit. The audit strategy would also indentify the general approach to the audit, that is whether emphasis will be on substantive procedures (substantive approach) or whether tests of controls will be used alongside substantive procedures (combined approach), and the resources needed. Tests of controls, i.e. tests on the operating effectiveness of controls in preventing, or detecting and correcting, material misstatement at the assertion level, are necessary when the auditor intends to rely on the effectiveness of controls in respect of a specific assertion or when substantive procedures cannot, on their own, provide sufficient appropriate evidence in respect of an assertion.

An illustrative example of an audit strategy memorandum that shows a possible format for the audit of a small entity is included at the end of the article. The memorandum has been adapted from the examples published in Practice Note 26 Guidance on smaller entity audit documentation (revised) issued by the Financial Reporting Council in UK and Ireland.

The detailed audit plan records the risk assessment procedures and the further audit procedures at the assertion level in response to the assessed risks. The audit plan describes the nature, extent and timing of the audit procedures to be performed by team members in respect of specific classes of transactions, account balances and disclosures. As already mentioned, in the case of an audit of a small

entity the audit plan would normally be included in standard audit programmes and schedules used for the various transactions and account balances. In any case the standard programmes need to be tailored so that the approach to an item, in terms of the use of substantive procedures, tests of controls or both, is proportional to the risk assessed for that item and is directed at obtaining audit evidence capable of verifying the underlying assertions, for example, for inventory, that would typically be evidence that confirms the existence, ownership, completeness and valuation of inventory.

The audit plan, and related audit programmes, should document why for certain items in the financial statements, limited or no further audit procedures would be undertaken, perhaps because the item is immaterial or carries a low risk of material misstatement, and why, for other items, extensive procedures would be undertaken, perhaps to deal with significant risks of material misstatement. The auditor may determine that in respect of a specific item the only effective approach would be that of performing tests of controls; as it may be the case when the entity conducts its business using exclusively IT and no documentation of transactions is produced other than in the IT system, therefore making it impossible to perform effective substantive procedures on their own. The auditor may otherwise conclude that only substantive procedures would be an effective approach for certain assertions, perhaps for the absence of controls relevant to the assertions, or that a combined approach is preferable.

However, irrespective of the approach selected and of the assessed risks of material misstatement, the auditor should bear in mind that ISA 330 specifically requires that substantive procedures should be planned and performed for each material class of transactions, account balance and disclosure. Therefore an approach contemplating only the performance of tests of controls would be possible only in respect of immaterial items, whilst for material assertions, even those for which substantive procedures alone are not effective, substantive analytical procedures or tests of details, or a combination of both, will need to be planned and performed.

Materiality

The determination of materiality at the planning stage of an audit is of essential importance as it influences the choice of further audit procedures in respect of specific assertions.

Materiality in planning and performing an audit

ISA 320 ‘Materiality in Planning and Performing an Audit’ addresses the issue of the approach to materiality determination by clarifying that materiality depends on the size and nature of an item, or by a combination of both, considered in light of the particular circumstances of its occurrence.

The standard does not outline a specific methodology, or suggests a formula, that should be applied for the determination of materiality, but it rather introduces guidance on the use of possible benchmarks, such as categories of reported income (like profit before tax, gross profit etc.), or of particularly relevant classes of transactions, account balances or disclosures, that should be corroborated by the exercise of professional judgement in arriving at suitable level(s) of materiality.

As well as requiring the determination of materiality for the financial statements as a whole, and for particular classes of transactions, account balances or disclosures, as the thresholds at which misstatement or omission of an item is expected to influence the economic decisions of the users of the accounts, ISA 320 also includes the requirement to set a ‘performance materiality’ level in respect of the overall financial statements and specific items.

Performance materiality is an amount lower than materiality that is used in assessing the risks of material misstatement and in designing audit procedures in response to such risks, so that the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality is reduced to an appropriately low level. Performance materiality is effectively a reduced level of materiality that should prevent the aggregate of individually immaterial misstatements and


THE ACCOUNTANT FEATURE

possible undetected misstatements to cause the financial statements to be materially misstated.

How much lower than materiality should performance materiality be, is not prescribed by ISA 320, which stresses that a simple mechanical calculation is not appropriate and that the auditor should exercise professional judgement and base the determination on his/her understanding of the entity, on misstatements identified in previous audits and on expectations in relation to misstatements in the current period. A simple rule-of-thumb percentage of materiality is unlikely to constitute a suitable level of performance materiality.

The illustrative example of an audit strategy memorandum for a small entity (see below) includes a section that deals with the determination of materiality and performance materiality that may helpful for the comprehension of the practical application of the concepts.

Involvement of audit engagement partner and key audit team members in planning

As discussed above, effective audit planning requires a systematic approach to risk identification and assessment that moves from

This example has been adapted from the examples published in Practice Note 26 Guidance on smaller entity audit documentation (revised) issued by the Financial Reporting Council in UK and Ireland.

Client: Bulls Restaurant and Hotel LimitedYear End: 31 January 20X1

Characteristics of the engagement

• Small private company registered in Malta.• Family company with two non-family shareholders and a number of

related party transactions during the year.• Accounts are prepared under GAPSE.• Accounting services, including payroll, provided by the part-time

bookkeeper.The permanent file documentation provides further information on understanding the business, the control environment and internal controls.Timing of reporting

• Year end is 31st January.• Audit fieldwork during May.• Partner to meet with directors to discuss results and accounts

signed in mid-June.

Significant factors

Materiality

Materiality for the financial statements as a whole

Materiality for the financial statements as a whole has been set at €13,500. This is based on 5% of an estimated profit before tax figure2 of €270,000, which is a consistent basis to that used in previous audits. An unadjusted profit before tax figure is appropriate as there are no exceptional items affecting profit before tax and the levels of directors’ remuneration are not abnormally high.

Lower levels of materiality for specific items

Users of the accounts are the shareholders and the bank. A lower level of materiality has been set in respect of the following classes of transactions, account balances and disclosures:

• Transactions between the company and individual family owners (relevant to the non-family shareholders) - €6,000

EXAMPLE 1 - AUDIT STRATEGY MEMORANDUM

acquiring a wider picture of the client to dealing with specific significant risks of misstatement with tailored responses. In order to draft an audit plan that is capable of addressing successfully the risks of the engagement, direct involvement of the audit partner and key staff in the planning process and effective communication between the team members is also essential. A two-way communication approach, especially exercised at the team planning meeting, can be the key. In fact such meeting, as well as featuring the partner and key staff informing the members of the audit team about the strategy, the specific approach to certain areas and what each member is required to do, should foster the involvement and the application of professional judgement by all staff in identifying areas that require better responses and those where low risk would allow fewer procedures to be performed.

Performance materiality

In assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures performance materiality has been set at €10,000 (and €5,000 for transactions between the company and individual family owners). This is judged to be sufficient as, on the basis of past audit errors (which have been primarily of a cut-off nature), there is a low probability that the aggregate of uncorrected and undetected misstatements will exceed the overall materiality.

Internal control• No past history of management override of controls. Audit staff will

be briefed to remain alert to this risk.• Managements’ attitude towards internal control is very positive• There are particular internal controls that we can plan to rely on.• These are documented in the systems information (Ref: C43).

Results of previous audit

No matters were identified during the previous audit to suggest a significant change in audit approach is needed.

Developments in the business

The audit manager held a preliminary meeting with management on 18th January. The purpose of this meeting was to:

• Discuss the nature, timing and extent of the audit work; and• • Enquire whether there have been any developments in the

business since the last audit that may impact the audit of the current period.

There have been no significant changes in the business activities since the last audit and no changes in the client’s staff. The current poor economic climate has led to a downturn in trading (turnover reduced by 10% to €2.7m), but the directors believe the company is still performing relatively well given the circumstances and are confident that the ability to continue as a going concern is not threatened.

The Freehold property was re-valued last year. However, in light of general falls in property values since then the client believes that a significant reduction in value should be recognised in the accounts this year.



This article is part of a suite of audit articles that highlight some of the common audit problems encountered by practitioners. Future articles will address other audit areas wherecommonproblemsarereportedandwilllookatwaysofimprovingtheefficiencyoftheauditprocess.

Risk assessment procedures performed

A preliminary analytical review of the December 20X0 management accounts was carried out (ref B34). The figures reflect a downturn in the current year’s trading levels (consistent with fall in occupancy levels). No unusual relationships were identified in gross profit figures and business appears to be continuing as normal.

The significant risks are:

• Property valuation;

• Incomplete sales recording due to high volume of cash transactions.

Further details on these risks and other matters giving rise to significant risks and how they will be addressed are documented in the Understanding of the Entity (Ref: AB2).

Nature, timing and extent of resources allocated

Paul Cox has been the audit engagement partner for the past eight years. Sarah Cole has been the audit manager since the audit for the year ended 20W7. The main audit work this year will be carried out by a student in their final year of training.

Prepared by Sarah Cole Date 18th January 20X1Approved by Paul Cox Date 20th January 20X1

No revisions to these items were found to be necessary during the course of the audit.

Sarah Cole Date 19th May 20X1Paul Cox Date 21st May 20X1

Planning

Stock-count

Final audit

Sign-off

• Amend audit strategy• Update permanent file information• Prepare audit programs

January 20X1

1 February 20X1

Commencing 10 May 20X119 May 20X121 May 20X1

Provisional date -2 June 20X1Mid-June 20X1

2 days

1 day

2 weeksThis will commence with the audit team planning meeting in the office before transferring to the client’s premisesManager reviewPartner review

Final meeting with client for approval of the accounts and signatureSigning the audit report

Junior member of staff to attend

The audit timetable is as follows:


THE ACCOUNTANTSMPs

SMPsSME Audits - QAU Findings, the SMP Perspective and a Simplified Audit Approach

On 21 February 2014, the MIA organised an event, whose main objective was to understand the shortcomings identified by the Quality Assurance Unit (QAU) during its second cycle of monitoring visits to audit practices, particularly those carrying out audits of smaller entities. 130 people attended for the event, whose agenda included three main sessions.

During the first session, MIA President, Ms Maria Micallef engaged with QAU Head, Mr Marcel Coppini in a question and answer exchange that sought to uncover the more common SME audit pitfalls.

In one of the initial exchanges Ms Micallef asked Mr Coppini to explain what he meant by the comment ‘a frequently quoted dictum, unpopular because of patronizing connotations – an audit is an audit’.

Mr Coppini said that the term “an audit is an audit” could be seen as far too patronizing by some smaller practitioners even though FEE had made it amply clear that no matter the size of the entity being audited, the basic audit principles must be respected. The overriding objective of a statutory audit is that of forming an opinion on the truth and fairness of the financial statements. International Standards on Auditing (ISAs) dictated how to arrive at that opinion – thereby the dictum “an audit is an audit”. Mr Coppini thought that the complexity rather than size should determine the audit effort involved. He regretted that not enough thinking was going into the planning and completion stages of SME audits. At this Ms Micallef enquired whether the dictum “an audit is an audit” meant that a one size would fit all, or whether the ISAs allowed for proportionality. Mr Coppini agreed that the clarified ISAs allowed for a degree of proportionate application but he did not think that this concept was always

Mark Abela is a Certified Public Accountant and is presently the Malta Institute of Accountants (MIA) Technical Director as well as a visiting lecturer at the University of Malta. Prior to joining the MIA in 2012, Mark enjoyed work experiences in audit and assurance with PWC, in financial management with the Maltese Ministry of Finance, in IFRS advisory with the European Financial Reporting and Advisory Group (EFRAG) in Brussels and in Enterprise Risk Services with Deloitte Malta. Mark holds a Bachelor’s degree in Accountancy and a Masters Degree in Financial Services from the University of Malta.

MARK ABELA


THE ACCOUNTANT SMPs

understood by practitioners and as a matter of fact, audit programmes were frequently overly tailored at the expense of overlooking the biggest risks.

Ms Micallef asked Mr Coppini to elaborate on his findings about SMPs risk assessment process. Mr Coppini was of the view that the biggest risk is that audit effort was put into those areas with little or no exposure whilst other bigger risks remained exposed, in other words practitioners were not being adequately sceptical. The MIA President asked about the evidence that the QAU expected to see to attest to the practitioner’s professional scepticism. Mr Coppini noted that professional scepticism was particularly relevant to the smaller practitioners in the context of micro-entities audits, where conclusions reached were not supported by documentation of the work done. The MIA President pointed out that IFAC indicated that it was not necessary for the auditor to document every minor matter considered, or every professional judgement made in an audit. Mr Coppini replied that one of the cardinal principles in auditing was to have appropriate and relevant audit evidence and documentation and that the golden rule to audit documentation is that it shall be sufficient to enable an experienced (third) auditor to understand the audit procedures performed, the audit evidence obtained and any significant judgment applied. He thought that audit documentation could be reduced for noncomplex entities but not that it would be discarded completely.

Ms Micallef turned to quality control and asked how quality control and ISQC 1 could be applied in the context of an SMP. The QAU Head believed that quality control procedures were key control measures. He revealed that this was an area which very often was not given the attention it deserved. Towards the end of the debate, the two discussed a number of other particular shortcomings that were identified by the audit regulator including materiality, related parties and related party transactions, going concern and completeness of income.

In the second session, SMP Committee Chairman, Mr William Spiteri Bailey moderated a panel discussion, whose objective was to present the auditors’ perspective to the shortcomings identified by the QAU. Panel members included Mr Mark Bugeja, Mr Hilary Galea Lauri, Mr David Pace, Mr Mark Scalpello and Mr Marcel Coppini. The panel considered the most important issues that were raised by the QAU’s Head.

As regards going concern, panel members thought that Mr Coppini’s view had remained unchanged since the QAU’s inception. By including an emphasis of matter paragraph on going concern auditors were ‘accused of washing their hands’. One panel member noted that in certain cases he felt the need to draw the users’ attention to this matter. Admittedly there could be some confusion amongst practitioners when reporting on going concern. Indeed some might still

choose to qualify their report if a material uncertainty is being properly disclosed in the financials, as opposed to including an emphasis of matter paragraph.

On inventory testing the panel thought that the QAU seems to feel that a short cut approach is being taken by practitioners by not carrying out alternative procedures. However such was normally the case because smaller entities did not have an integrated computerised stock system which precluded such alternative procedures.

Some panel members agreed that sometimes practitioners may find documenting the obvious a waste of time, however this had to be done. They agreed with Mr Coppini that the audit file should contain documentation of the auditor’s reasoning. The panel thought that Mr Coppini was being too rigid on smaller audits, expecting extensive documentation also in these cases. They thought that reaching an adequate compromise is subjective and the warrant holder needs to be given some discretion as to the methods used and ways of documenting it.

While practitioners admitted that there might be instances where some risks were overlooked, they insisted that the previous year’s file and a friendly chat with management could give a very good indication of any risks. If none are perceived, practitioners did not think that auditors should try to find risks even when no alarms go off. This was being overly sceptical. In addition panellists thought that this could only be overcome if fees were allowed to increase to allow the audit partner to really focus on planning and risk assessment. During this session the audience was given the opportunity to engage in an interactive session with the panellists to explore ways of how these shortcomings can be overcome. Questions from the floor included: The role of the QAU and whether it should be more of an educator and not a watch dog; the Regulatory burden being placed on SMPs, including pressures from the Accountancy Board, the FIAU and now the MFSA.

In the third and final session Mr Simon Flynn and Ms Lucienne Pace Ross, Partners at PricewaterhouseCoopers discussed how ISAs can be applied in the context of SME audits and linked this to the shortcomings identified by the QAU on SME audits.

The Institute will be publishing a suit of articles in the Accountant that will highlight common audit problems encountered by practitioners and that will look at ways of improving the efficiency of the audit process. In addition, the Institute will also be holding a series of thematic workshops that will address the main pitfalls that have been highlighted by the QAU.



SMPsReview Engagements – A Value-Adding Client Service

Professional accountants in practice are frequently looked upon as trusted business advisors. This relationship stems from their significant breadth of business experience combined with detailed knowledge of their clients’ businesses, much of which is obtained in the process of performing assurance engagements on their clients’ financial statements. Professional accountants are therefore in a unique position to add value, both in terms of enhancing the credibility of their clients’ financial statements and being able to provide them with tailored business advice.

The International Auditing and Assurance Standards Board (IAASB) has issued International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements, which is now effective for periods ended on or after December 31, 2013. Review engagements provide a limited form of assurance on historical financial statements and may be a cost effective and value-adding alternative when an audit is not required.

Adding Cost-Effective Value to Clients

A review, consisting primarily of inquiry and analysis, is based on the professional accountant’s understanding of the entity and its environment and the applicable financial reporting framework according to which the financial statements are prepared. This understanding includes relevant industry, regulatory, and other external factors; the entity’s operations, ownership, and governance structure; how it is financed; and its accounting systems and records. The professional accountant uses this knowledge to design and perform inquiry and analytical procedures on both material items in the financial statements and on those items where material misstatements are likely to arise. In the course of the engagement, the practitioner develops a significant understanding of the client and its business, which gives him/her an excellent opportunity to offer additional value to the client through the provision of bespoke advice.Practitioners can provide review services most efficiently by staffing a review engagement with professionals competent in assurance skills and techniques, consistently using the same staff members, and making use of technology to automate the mechanics of the engagement wherever possible. As so much of a review consists of effective communication with clients, performing a significant proportion of the work at the client’s place of business is preferable.

Adding a Meaningful Level of Assurance to Financial Statements

In accordance with ISRE 2400 (Revised), a review engagement is not just about practitioners obtaining knowledge of their clients through questions and analysis; it also requires the accountant to dig deeper and obtain additional evidence if it is determined there may be a material misstatement in the financial statements. Additional procedures are also required when further questions arise, such as if related party transactions fall outside the normal course of business, fraud or non-compliance with laws or regulations is suspected, or doubts arise regarding the entity’s ability to continue as a going concern. This additional work effort allows for the meaningful and

valuable level of assurance conveyed by the review conclusion. Under ISRE 2400 (Revised), the practitioner is required to comply with relevant ethical requirements, including those pertaining to independence in the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), or national equivalent requirements that are at least as restrictive. The review standard also requires professional accountants to exercise professional judgment and to be skeptical throughout the engagement.

Benefits for All Parties Involved

In summary, there are benefits for all parties involved in an ISRE 2400 (Revised) review engagement. Practitioners will obtain the knowledge base to enable them to add value to their clients’ businesses while expressing the assurance conclusions needed on annual financial statements. Clients and other financial statements users will have the comfort of a meaningful level of assurance provided by an objective and independent professional accountant.

A Guide to Reviews for Practitioners and IFAC Member Bodies

The newest guide from the IFAC SMP Committee, the Guide to Review Engagements, is intended to help IFAC member organisations and their members in practice, especially small- and medium-sized practices (SMPs), with the implementation of ISRE 2400 (Revised). To help practitioners develop a deeper understanding of a review engagement conducted in compliance with the standard, the guide includes illustrative examples alongside relevant extracts from the standard. It also includes practical points for practitioners’ consideration, tips on how to efficiently implement the standard, and checklists and forms that practitioners can adapt to meet the requirements and circumstances in their particular jurisdiction.

IFAC Resources

Visit the SMP area of the IFAC website at www.ifac.org/SMP to access this and other guides from the SMP Committee, learn more about the committee’s activities, and subscribe to the SMP eNews. While the guide includes relevant extracts from ISRE 2400 (Revised), the complete standard is available in the 2013 IAASB Handbook.

• Guide to Review Engagements

Additional articles:•ReviewEngagementsforSMEs:LimitedAssurance,NumerousBenefits–theAccountant Winter 2014•TheStandardforLimitedAssuranceReviewEngagements

Join the discussion and stay informed! Follow the SMP Committee on Twitter (@IFAC¬_SMP) and LinkedIn (IFAC SMP Community). Look for additional relevant resources under Audit & Assurance, coming in April 2014 to the IFAC Global Knowledge Gateway.

Copyright © February 2014 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC.

Phil Cowperthwaite



SMPsGlobal Knowledge Gateway, Hosted by IFAC - Venue for Global Accountancy Profession to Share, Learn, Engage, and Grow

Join the conversation at: www.ifac.org/global-knowledge-gateway.

New online portal to global knowledge, resources, and news serves and connects accountants worldwide

The International Federation of Accountants (IFAC) has launched the Global Knowledge Gateway, a new digital hub for the global accountancy profession: www.ifac.org/global-knowledge-gateway. The Gateway serves professional accountants and aspiring accountants in all sectors by providing streamlined access to relevant resources, news, discussions, and thought leadership.

Interested in debating the latest global developments impacting our profession? Looking for best practices in risk management? Have a question about recent trends in business reporting? Want to help shape the future direction of your profession?

LOOK NO FURTHER.

Initially focused on nine topic areas (see box), the Gateway brings together the some of the best globally relevant resources, facilitates knowledge sharing, and creates a community of professional accountants around the world.

Users can filter resources by topic area, subcategory, type of resource, or source. “Recommend” resources that you find the most useful, and suggest new resources to include. Browse topical news as well as the latest general accountancy news. Stay informed about upcoming events and conferences. Read Viewpoints by VIPs in the profession and the wider business world. Participate in Discussions, designed to encourage debate.

You can also subscribe to have new content delivered straight to your inbox—from all Gateway topic areas or only the ones that matter most to you.

Help make the Gateway an essential knowledge database and community for the international accountancy profession. Visit today!

Initial Gateway topic areas support accountants in business and those advising business. Additional topics for professional accountants in practice, particularly those operating in small- and medium-sized practices, will be added soon.

• Business Reporting—improving the usefulness of reported information • Ethics—reinforcing ethical practices that ensure an ethical workplace • Finance Leadership & Development—responding to the changing expectations of society and organisations around leadership roles • Governance—improving the systems and structure by which entities make decisions, execute them, and monitor the results• Performance and Financial Management—improving organisational performance through better support for strategic and operational decision

making • Risk Management & Internal Control—addressing uncertainty in setting and pursuing the organisation’s objectives.• Sustainability—integrating sustainability into management, reporting, and assurance practices.

Coming Soon:• Audit & Assurance—facilitating the development, adoption, and implementation, of international standards • Practice Management—supporting practitioners in managing and growing their practices

Copyright © February 2014 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact [email protected] for permission to reproduce, store, or transmit this document.



Jeanette Calleja Borg holds the position of Assistant Manager in the International Tax Department at Deloitte Malta. She obtained a Bachelor of Commerce, a Bachelor of Accountancy (Hons.), and subsequently a Masters in Financial Services from the University of Malta. She is currently reading for a PhD in Taxation at the School of Law, within the Centre for Commercial Legal Studies at Queen Mary, University of London. She has also been a guest researcher at the Institute for Austrian and International Tax Law in Vienna during 2011 and 2012/2013. Jeanette Calleja Borg is a member of the Malta Institute of Taxation Council. She is also a member of the Malta Institute for Accountants. She can be contacted at [email protected].

Jeanette Calleja Borg

FEATUREThe Tax Treatment of Losses under the Proposed Common Consolidated Corporate Tax Base Directive.

Introduction

On March 16 2011 the European Commission published its proposal for a Common Consolidated Corporate Tax Base directive (CCCTB). The CCCTB is a set of rules by which groups of companies that are tax resident in the European Union (EU) or EU-located branches of third-country companies would be able to submit a single consolidated European corporate tax return.1 This implies that the group operating within the EU would be able to offset the losses of group members against the profits of other group members in order to arrive at the consolidated tax base, even when the group members are residents of different EU Member States. This paper will discuss how losses are treated under the proposed CCCTB directive. The first section will deal with losses on entering the CCCTB regime; the second section will address losses during the CCCTB regime while the third section will deal with losses after exiting the CCCTB regime. In the final section the paper will be concluded with a conclusion.

Losses prior to entering the CCCTB regime

Article 48 of the proposed CCCTB directive provides that losses incurred before opting for the CCCTB regime may be deducted from the tax base ‘to the extent provided under national law’ given that the losses would have been able to be carried forward under the applicable national law. This provision applies for a single taxpayer who opts to be included in the CCCTB regime and not for a group.2 These pre-CCCTB losses can be utilised by the taxpayer but these would still be governed by the provisions applicable under national law. So, the CCCTB does not ignore the losses, it is just that their use within the system is conditioned by the national law. The foregoing continues to apply if the company then enters a group while it still has unused losses incurred under national rules.3 By means of this rule it is ensured that there is no major impact with regards to unrelieved losses when a taxpayer opts for the CCCTB regime. If under national law the taxpayer was allowed to carry forward losses for up to 3 years the same will still apply for the pre-CCCTB losses.

Article 64 deals with losses incurred by either:

1. a company (‘taxpayer’) or permanent establishment (PE) which has already been applying the CCCTB rules as a ‘single taxpayer’ or member of a CCCTB group and now enters a (or another) CCCTB group; or

2. a company (‘taxpayer’) or PE which enters a CCCTB group (e.g. as a result of an acquisition of shares) directly from its national corporate tax system.

Based on the above distinction, where a company (or PE) enters a CCCTB group, Article 64 needs to be taken into account, which prescribes that the losses shall be offset against the apportioned share of the profits of the new group member according to the rules of the previous regime under which they were incurred, either national rules or in accordance with Article 43 (CCCTB system).

National law can include provisions for a time-expiry for offsetting losses or ceilings as to the maximum amount that may be deducted in a tax year. On the other hand the proposed CCCTB directive under Article 43 provides for unlimited carry forward of losses.4 A taxpayer whose national law provides for such time-expiry restrictions would be better off in applying for the CCCTB regime in order to benefit from unlimited carry forward of losses if the provisions under Article 48 and Article 64 were not present. Therefore, these articles minimise the possibility of distortions in the internal market in relation to pre-CCCTB losses.

In practice it will follow that if a company which is currently applying the CCCTB regime as a single taxpayer moves into a CCCTB group, it may be carrying both pre-CCCTB losses incurred under national law as well as CCCTB losses generated during the period that it applied the system as a single taxpayer (i.e. without consolidation). In this particular case, Article 64 should be read in conjunction with Article 43 in order to find the order of precedence when offsetting losses. Article 43 (3) provides that the oldest losses shall be used first’. This provision is particularly important when a company is carrying pre-



CCCTB losses incurred under national law especially if national law provides for time-expiry rules.

Article 64 provides that the unrelieved losses incurred prior to the taxpayer joining the CCCTB group can only be offset against the apportioned share of the said tax payer. These losses are in fact ring fenced and only deductible in the Member State of residence of the tax payer.

The same would apply under article 71-business reorganisation. Article 71 provides for the following two circumstances of business reorganisation:

1. “as a result of a business reorganisation, one or more groups, or two or more members of a group, become part of another group”. E.g. as a result of an acquisition of shares;

2. “where two or more principal taxpayers merge within the meaning of Article 2(a)(i) and (ii) of Council Directive 2009/133/EC.

In both these cases the unrelieved losses prior to the business organisation are ring fenced and deducted from the apportioned part of the tax base of the taxpayer in accordance with Article 102 of the proposed CCCTB directive.

Hohenwarter5 finds this ring fencing to be unsystematic when the consolidated group is regarded as one economic entity. She however, finds it to be a reasonable compromise from a political point of view. The ring fencing of pre-consolidation losses safeguards Member States from having to take into account losses incurred outside their territory which might also have been incurred prior to the group having been established. It safeguards against the transferring of losses cross-border and the erosion of Member State’s tax revenue. Therefore national losses incurred prior to the group opting for the CCCTB regime will not be transferred cross-border once the group starts applying the regime.

Even though the losses remain with the Member State of residence of the taxpayer, cross-border loss offset is in fact being carried out. Without the CCCTB regime the taxpayer would have continued to carry over losses. Under the CCCTB regime the losses carried forward can now be offset against the apportioned tax base which is made up of profits of group members resident in other Member States.

The implication of this provision is significant especially in a time of financial crisis where it is probable that a lot of companies have accumulated losses. If unrelieved losses incurred prior to the taxpayer entering the CCCTB group were not ring fenced, this could imply that losses would be shifted cross-border at the point of entry in the CCCTB as the losses would be included in the CCCTB tax base with the result that the tax base would be significantly reduced.

The CCCTB regime entails full consolidation of the results of the members of the group. The ownership threshold for including a subsidiary in the group does not exclude the presence of minority shareholders. Subsidiaries can be consolidated as long as the parent company holds more than 5 percent of the voting rights and more than 75 percent of the equity, or more than 75 percent of the rights to profits.

Due to the apportionment formula the member’s individual corporate interests can be effected by the rules governing this apportionment, since these rules will serve to the determine the tax liability of each individual group member. Even though pre-consolidation losses are ring fenced and can only be used against the apportioned shares of profits by the individual company, if this share of profits is more than it would have been if there was no CCCTB regime the pre-consolidation losses would be used up quicker. Tax would be paid at an earlier stage in this scenario, which is a determent to the minority shareholders. Also, if the individual company pays more tax it has less distributable profits. This undermines the interests of the company’s minority shareholders. From the text of the Directive it appears that the collective interest prevails over individual interest, a situation that is harmful to the interest of minority shareholders.

The following section will discuss how losses are treated once a group of companies operating in the EU has opted to adopt the CCCTB regime.

Losses during the CCCTB regime

The CCCTB draft proposal provides for an unrestricted loss carry forward system with no loss carry back.6 However, in the proposed amendments under the Danish Presidency discussed on April 25th, 20127 it was proposed that tax loss carry forward not exceeding €1 million could be utilised without restrictions, but any excess loss could only be deducted up to an amount equal to 60% of the remaining tax base. Losses which are not utilised due to this restriction are not lost but carried forward to subsequent years. Companies in the group are made to pay tax in advance on losses which can be utilised in subsequent years if enough profits are available. This limitation is clearly proposed in order to limit the impact of losses on the tax revenue of the Member States. By means of this proposal it is ensured that companies pay some tax in a current year. This creates a disadvantage for groups of companies who are still made to pay tax even though they still have losses that could be offset against the tax base. This is also a determinant to the minority shareholders of the group. These shareholders do not benefit directly from group taxation and would be directly affected by this provision. The Danish Presidency proposed amendments do not provide provisions in case of reorganisation. If this amendment is to be approved, further amendments would need to be made in case of losses upon a reorganisation.

In article 43(3) the proposed Directive also provides that the oldest losses will be utilised first, thus allowing the utilisation of all losses incurred prior the group joining the CCCTB regime and imported in the CCCTB regime.

One might argue that the CCCTB regime also implies a shift in the exercising of taxing powers by Member States. Without the CCCTB regime the Member State of residence of the profit making company would have fully taxed the profits of that company. Since with the CCCTB regime losses of a non-resident member of the group are now included in the tax base, a portion of those losses are indirectly being absorbed by the Member State of the profit making company through the allocation formula. Thus, there is a shift in taxing powers as this Member State is inevitable renouncing taxing part of the profits of the resident company. This shift in taxing powers is in favour of the Member State with the loss making company who will be allocated a portion of the tax base to tax whilst in a non-CCCTB situation this Member State would not have levied any tax.

This shift in the exercising of taxing powers has also a direct impact on the interests of minority shareholders. When an individual company is taxed more as a result of the CCCTB regime, the minority shareholders will be at a disadvantage as more tax would have been paid and fewer profits can be distributed. On the other hand when an individual company is taxed less as a result of the CCCTB regime, the minority shareholders are at an advantage as less tax is paid and more profits can be distributed.

The CCCTB regime has to be applied initially for a term of 5 years and then for consecutive terms of 3 years. However, if a new member joins the group the 5 year period of the group is not altered. Thus and individual taxpayer can join the group in year 4. If this taxpayer had accumulated losses now these losses can be deducted against the individual’s taxpayer apportioned share. If the group exits the CCCTB regime after the 5 years it might be the case that most of the accumulated losses of the taxpayer have been utilised. This is again a disadvantage to the minority interest shareholders of the particular taxpayer also given that this individual taxpayer has formed part of the CCCTB group for a very short period of time.

Minority interest shareholders are an important part of the equation and the CCCTB regime does not cater for them contrary to some national legislation. For example the UK and France provide for compensation to be provided to the company whose losses are being utilised in order to safeguard the interests of minority shareholders. This compensation is aimed at quantifying the disadvantages caused by the surrender of losses and sets out the terms of an indemnity


THE ACCOUNTANT FEATURE

payment. This indemnity, paid by the consolidating parent/company utilising the losses to the surrendering company, tends to compensate the additional tax liability carried forward, against the surrendering company’s own profits.

Article 43(2) states that ‘a reduction of the tax base on account of losses from previous tax years shall not result in a negative amount.’ This implies that losses can only be included in the tax base as long as these do not exceed profits included in the tax base. 8 This article applies to both groups and a single taxpayer opting for the CCCTB regime. If a taxpayer has carried forward losses in a profitable tax year, the taxpayer may only use such losses up to the amount of its taxable profits in that same tax year and carry forward the loss balance for future years.

Article 869 which portrays the general principles of the apportionment of the consolidated tax base provides in point 2 that ‘the consolidated tax base of a group shall be shared only when it is positive.’ If a CCCTB group is loss-making in a tax year, the negative consolidated tax base will not be shared that year, irrespective of whether some group members may be profit-making. This is because the proposal’s rules on consolidation prescribe that the (positive or negative) individual tax results of group members are added up together to form the consolidated tax base which may be positive or negative. In the first case, the formula is used to distribute taxable shares of income to all group members (regardless of whether they have been profit-or loss-making that year). By contrast, if the consolidated tax base is negative, it is kept undistributed and the losses are carried forward to be offset in future years.10

For example a CCCTB group has the following companies situated in different EU Member States with the following financial results for the year end.

The overall result in this case is a loss of €300. No tax will be paid by the group in year 0 but €300 will be carried forward as a consolidated group loss for future years.

The provision under article 57(2) of the proposed CCCTB directive is aimed at avoiding stranded losses.11 However, this approach implies that profits are in fact shared by all tax payers whereas losses are just attributed to the group and not shared. This results in an asymmetrical treatment of profits and losses in the CCCTB regime. Also, as the structure of a group remains constant and the sharing mechanism remains stable as well, there will be no stranded losses. Problems only arise when the sharing mechanism changes.12

Taking the previous example if Companies X, Y and Z had equal apportionment rights than if the overall loss of €300 was to be apportioned to each Member State, all companies would have €100 of losses carried forward. In year 2 Company Z generates a profit of €300 while Companies X and Y have a result of €0. The €300 is the consolidated tax base which is shared among the 3 companies (€100) each. The losses carried forward would be deducted against the apportioned tax base and the group would pay no tax in year 2.

If the €300 loss was carried forward at the level of the group (as per the CCCTB proposed directive), in year 2 the consolidated tax base would be 0 (€300 profit for year – €300 loss carried forward). The group will again pay no tax.

Therefore it makes no difference whether the losses are carried forward at group level or whether they are apportioned to the individual taxpayer. Taking the same example but in the year 2 changing the apportionment base to Company X ½, Companies Y and Z ¼ each. The following would be the results.

• Where losses are attributed to the taxpayer the consolidated tax base in year 2 is €300 which is apportioned to Company X €150 and Companies Y & Z €75 each. In this case Company X will have to pay tax on €50 (€150-€100), while Companies Y & Z will have €25 of losses carried forward each.

• When losses remain at the level of the group, the consolidated tax base in year 2 is €0 and the group would not pay any tax.

It makes a difference whether losses are attributed to the taxpayer or left at group level when the sharing ratio changes. However, one might argue that the losses were incurred by the group at the point where there was a different sharing ratio and it may thus be fairer if the losses are attributed to the taxpayers. This argument must also be considered given the varying degree of tax rates in the different EU Member States.

If Member States B & C for example have higher tax rates, the losses would be more beneficial for the group if utilised in those Member States against future taxable profits there. When the consolidated tax base results in a profit this is shared according to the allocation formula and tax is paid according to the individual Member States tax rate. By keeping losses at the level of the group there may be an effect in the total taxation paid by the group over a number of years due to the varying tax rates.

The proposed CCCTB directive also addresses non-EU subsidiary losses under Controlled Foreign Companies (CFC) rules. Article 82 provides for specific anti-abuse rules for CFC resident in third countries. The following conditions need to be met:

• an EU company as group member (directly/indirectly) holds > 50 % in voting rights, share capital or profit entitlement in entity resident in third country; and

• third country CFC is subject to low tax regime with certain amount and type of passive income.

In the case of losses article 83(1) provides that “losses of the foreign entity shall not be included in the tax base but shall be carried forward and taken into account when applying Article 82 in subsequent years.” There is therefore no import of losses through the application of the CFC rules.

The income from a third country PE is exempt under article 11(e) of the proposed directive. The proposed directive does not provide a definition of what is ‘income’. When one reads through article 11 it gives the impression that it deals with positive results and therefore one can deduce that positive results of a third country PE are exempt. The proposed directive makes no specific mention to losses of a third country PE. Would the interaction between the proposed CCCTB regime and existing double taxation conventions imply that when the credit method is applied losses can be taken into account and profits exempt? Since the proposed directive does not provide a definition of ‘income’ would the neutral interpretation of ‘income’ under the double taxation conventions apply? If this is the case than it would imply that losses are also exempt? The proposed directive should provide further clarification with regards to the results of third country PEs.

This article has been published in Intertax Volume 41, issue 11 pages 581-587, 2013KluwerLawInternationalBV,TheNetherlands.

The author wishes to thank Profs. Pasquale Pistone and Mr. Lluís Fargas for their valuable comments to this article.

The views expressed in this article are the author’s views and do not necessarily reflecttheviewsofDeloitteMalta.

Part 2 of this article will feature in the Summer issue of The Accountant.

1‘CommonTaxBase-Europeancommission’,availableonline http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htmAccessedon3December20122Asingletaxpayerisataxpayerwhodoesnotfullfilltherequirementsof

Company X (situated in Member State A) 600 Profit

€

Company Y (situated in Member State B) (600) Loss

Company Z (situated in Member State C) (300) Loss


consolidationandstilloptstoapplythesystemundertheCCCTBdirective.3‘ProposalforaCouncilDirectiveonaCommonConsolidatedCorporateTaxBase(CCCTB){SEC(2011)315SEC(2011)316}COM(2011121/4’,2011Article 644It should be brought to attention that in the proposed amendments under the DanishPresidencydiscussedonthe25April2012itwasproposedthattaxlosscarry forwards not exceeding €1 million could be utilized without restrictions. However, any excess loss could only be deducted up to an amount equal to 60% of the remaining tax base. 5DanielaHohenwarter-Mayr,‘MovingInandOutofaGroup’inCommonConsolidatedCorporateTaxBaseeditedbyMichaelLang,PasqualePistone,Josef Schuch and Claus Staringer, vol. 53 (Linde 2008), Series on International TaxLawUniv.-Prof.Dr.MichaelLang(Editor),1796ProposalforaCouncilDirectiveonaCommonConsolidatedCorporateTaxBase(CCCTB){SEC(2011)315SEC(2011)316}COM(2011121/4’Article43(1)7CounciloftheEuropeanUnion,Bruseels,‘ProposalforaCouncilDirectiveonaCommonConsolidatedCorporateTaxBase-Presidencycommentsonthecompromise proposal.’, April 25, 20128This provision will not apply in situations where losses exceed €1,000,000 if the DanishPresidencyproposedamendmentsareapplied.

9AppliestoCCCTBgroups.10Article101‘ProposalforaCouncilDirectiveonaCommonConsolidatedCorporateTaxBase(CCCTB){SEC(2011)315SEC(2011)316}COM(2011121/4’;Article57(2)‘CommonCorporateConsolidatedTaxBaseWorkingGroup(CCCTBWG).CCCTB:PossibleelementsofaTechnicalOutline.CCCTB/WP057’, July 26, 200711Partial attribution of losses to group members which afterwards are unable to generateprofits.12Hohenwarter-Mayr,‘MovingInandOutofaGroup’181

THE ACCOUNTANT Feature


THE ACCOUNTANTNEWS

Introduction

More than four years have passed since the Commission issued a proposal for an Alternative Investment Fund Managers Directive (‘AIFMD’), which formed part of the EU policy response to the financial crisis of 2007-2008. The world of EU securities regulation and supervision has changed considerably since then. The Lisbon Treaty came into force and changed the law-making process for delegated acts to be adopted by the Commission. The European Institutions implemented a significant revamp of the European regulatory framework by widening the scope of regulation and the extent of detail of substantive law applicable to securities markets. The European Securities and Markets Authority (‘ESMA’) became operative with strong powers to make regulation in the form of technical standards and with the tools to force supervisory convergence at national level. ESMA was also vested with a de facto pan-European supervisory role for credit rating agencies and trade repositories and has the function of coordinating colleges of supervisors for central counterparties.

The significant regulatory and supervisory response to the financial crisis and the subsequent euro-crisis changed the dynamic of financial regulation and supervision of securities business in the EU, including that applicable to alternative investment fund management. The AIFMD regulates the activity of all fund managers (‘AIFM’) which manage alternative investment funds (‘AIF’) being all those collective investment schemes that do not qualify as UCITS schemes. Malta is a jurisdiction of choice for international financial services, particularly in the funds sector with over 600 international funds, 60 fund managers and 27 fund administrators established in Malta. The scope of the Directive is wide and, as a consequence, it captures a significant majority of the Malta industry. The implementation of the Directive has been carried out by the Malta Financial Services Authority (‘MFSA’), Malta’s single regulator and supervisor for financial services.

The purpose of this paper is to briefly examine the negotiation stage of the AIFMD from Malta’s perspective and the implementation of the AIFMD by the MFSA. For narrative ease the paper has been subdivided into three additional sections. Section 1 examines briefly

the Malta experience during the AIFMD legislative process and the issues raised by Malta during the different stages of this process. Section 2 analyses the transposition of the AIFMD in Malta, the challenges arising from practical implementation and how these were addressed by the MFSA in practice. Concluding remarks are made at the end of the paper including a note on how the future challenges in this field of regulation may be addressed.

Section 1: AIFMD Legislative Process

The Commission’s proposal for the regulation of the alternative investment funds industry was published in April 2009. It immediately became the subject of controversy, particularly with the hedge funds industry in London threatening to move outside the EU. The Commission’s proposal required greater transparency, restrictions on leverage and a higher degree of capital held by fund managers. This specific regulation was required in order to fulfil EU policy-makers’ commitment to apply harmonised EU regulation in fields of finance which were largely unregulated before the financial crisis. However, the Commission’s proposal came under scrutiny as having been prepared in haste and without proper consultation. In particular, it tried to apply a one size fits all regime to an industry which is characterised by very different types of players. The same points were raised by Member States during the meetings of the Council of the European Union and by MEPs at the European Parliament.

Along the way, the various issues of concern raised during the initial stages of the debate were tackled through revisions to the Commission’s proposal. Other concerns were, however, triggered during this process. This was the case of the depositary passport, which was Malta’s main issue during the debate on the level 1 text.

The Commission’s proposal required the appointment of the depositary by the AIF having the role of safekeeping the assets of the fund and monitoring the activity of the fund manager. The proposal required the depositary to be a credit institution in the EU, thereby allowing free movement in the field of depositary services. As a consequence of discussions in Council and at the specific request of a number of Member States, the text was amended to

Mr. Buttigieg is a Deputy Director within the Securities and Markets Supervision Unit of the Malta Financial Services Authority. He is a certified public accountant, has a Masters degree in Financial Services from the University of Malta and a Masters degree in European Law and Society from the University of Sussex (UK). A Chevening Scholar, Mr. Buttigieg is also an assistant lecturer within the Banking and Finance Department of the University of Malta and is currently reading for a D.Phil in EU Law at the University of Sussex.

Christopher P. Buttigieg

FEATURENegotiating and Implementing the AIFMD - The Malta Experience



include a requirement that the depositary had to be established in the same Member State of the AIF. This created an issue for a number of Member States where the depositary industry was not yet fully developed, as the lack of competition from external depositaries would most likely result in inefficiencies and higher charges applied by the local depositary business. Moreover, it was Malta’s view that the restriction on the free movement of depositaries would have a serious impact on the development and growth of the funds industry in the affected Member States.

Malta made the point that a depositary passport was necessary to complete the internal market for the funds industry and that the mechanisms for such a passport to operate had already been established, particularly given the extent of existing harmonisation of the requirements applicable to credit institutions and investment firms in the EU. In Malta’s view the extent of harmonisation of the activity of depositaries should have allowed a framework for mutual recognition between Member States to operate effectively in this field. However, the majority of Member States in Council were, at that stage, not yet convinced about the desirability of mutual recognition in the field of depositary services, particularly given the alleged importance of proximity of supervision of the depositary by the financial supervisor of the AIF. Malta further argued that unless a full depositary passport was allowed, Member States should as a minimum be granted the option to permit EEA credit institutions and investment firms to get access to their market and provide depositary services within their territory. This was a pragmatic solution to address the depositary passport challenge during the stage of the AIFMD legislative process.

Ultimately, the requests made by Malta and other Member States having a similar view resulted in a compromise whereby a transitional provision for a period of four years was included in the AIFMD. This transitional provision gives Member States the discretion to allow AIFs established on their territory to appoint depositaries in other Member States. This discretion is however restricted to the appointment of depositaries that are authorised as credit institutions in their home Member State. Furthermore, the text of the Directive was amended to include a recital which invites the European Commission to put forward an appropriate horizontal legislative proposal which inter alia governs the right of a depositary in one Member State to provide services in other Member States. The overall intention of these amendments being that of giving Member States, where the depositary industry is not yet fully developed, sufficient time to allow their depositary industry to grow, while at the same time giving the European Commission the time to put the depositary passport back on its legislative agenda. This has already materialised in the case of UCITS funds with the publication of the 2012 UCITS VI Consultation.

At level 2 of the AIFMD legislative process, the major issue of contention emerged from the requirements which regulate the delegation by an AIFM to a sub-manager, specifically the requirements on letter-box entities. The version of the AIFMD Delegated Regulation issued in March 2012 inter alia stipulated a quantitative test whereby, in the event that the totality of the individual tasks delegated by the AIFM substantially exceeded the tasks carried out by itself, the AIFM was to be considered as a letter-box entity. This meant that the fund manager would no longer be considered an AIFM for the purposes of the Directive. This provision raised significant concerns within the hedge fund industry, particularly given the accepted market practice for fund managers to make the high-level policy decisions directly while delegating the day-to-day stock picking and risk management of the portfolio to another firm in the EU or a third country. This accepted market practice allowed the realisation of a certain degree of economies of scale.

The proposed rule on letter-box entity meant that the AIFM would have to undertake much of the previously delegated activity directly. This would have made the prevailing delegation model unworkable for an AIFM and would have resulted in a significant amount of restructuring within the industry, with the cost being passed on to investors. This was Malta’s most significant concern at this stage of the AIFMD legislative process. Malta, together with other Member States, argued in favour of a more workable solution with regard to the letter-box entity requirements. Ultimately, the Commission moved away from the quantitative determination of a letter-box entity,

by replacing the proposed rule with an approach which requires the assessment of compliance of the delegation structure with an established set of qualitative criteria. However, this meant that the mechanism for assessing the delegation arrangements would most likely result in different interpretations of the relevant requirements at national level and, as a consequence, in a fragmented approach to the supervision of AIFM delegation structures and in opportunities for supervisory arbitrage.

In an attempt to resolve the risks resulting from an uneven approach to the interpretation of the requirements on letter-box entities, the Commission Delegated Regulation stipulates that ESMA may issue guidelines to ensure a consistent assessment of delegation structures across the Union. Unfortunately, while ESMA has carried out a sterling job on AIFMD at Level III, above all in negotiating MOUs with over 40 third country competent authorities for the purpose of the Directive and in establishing a consistent approach to the application of the reporting by AIFM and the implementation of the requirements on remuneration, it has yet to initiate work in the field of delegation by AIFM. This is a key area for convergence if the intended harmonisation objectives of the Directive are to be achieved in practice.

Section 2: The Transposition and Implementation Process carried out by Malta

As the AIFMD has an impact on a significant majority of fund management companies and collective investment schemes established in Malta, the implementation of the Directive became a top priority on the Authority’s regulatory agenda. To address the implementation challenge, the Authority set-up an Implementation Working Committee which was inter alia responsible for suggesting amendments to the local legislative framework for the purpose of the AIFMD. The Committee had three main objectives: [i] carrying out the correct transposition and implementation of the AIFMD and subsidiary legislation; [ii] ensuring a smooth transition from the existing regime for the regulation of Non-UCITS fund managers, which was largely based on MiFID, to the AIFMD regime; and [iii] ensuring that certain features of the regime, such as the framework for the regulation of professional investor funds, would be retained.

The Implementation process resulted in: various changes being implemented to the Investment Services Act which is Malta’s primary legislation that regulates the activity of investment services licence holders and collectives investment schemes; the publication of four new legal notices which regulate the passporting by AIFM, the marketing of AIFs, and the activity of third country operators; and significant changes to the structure and content of the MFSA’s Investment Services Rules which regulate the activity of investment services licence holders in Malta.

From a services provider perspective, the Investment Services Rules for Investment Services Providers were restructured to reflect the European framework for securities business i.e. MiFID, UCITS and the AIFMD. Article 3 of the AIFMD provides an exemption for small fund managers and lays the foundations for a de minimis regime, however, Malta decided to exercise the discretion to regulate de minimis fund managers through an existing licensing process rather than registration, as it considered that it is in the best interest of fund managers to be licensed particularly when dealing with potential investors. Moreover, it is the MFSA’s policy that only persons who are assessed as being fit and proper to provide financial services and subject to proper investor protection regulation (including anti-money laundering and funding of terrorism regulation) should be allowed to establish a financial activity in Malta, These decisions are reflected in the published Rulebook.1

Malta also decided to introduce a depositary-lite regime. The AIFMD contemplates the possible provision of services by a depositary-lite in the case of third country funds and EU AIFs which have no redemption rights exercisable during the period of 5 years from the date of the initial investment and which, in accordance with their core investment policy, generally do not invest in assets that must be held in custody. Malta’s depositary-lite allows entities such as recognised fund administrators and investment firms that are subject to an initial




Malta, like other Member States, faced a number of challenges and issues which would have had an impact on its competitiveness as a jurisdiction of choice for international financial services. Malta took the necessary steps to ensure that these issues would be properly addressed. During the negotiations in the Council of the European Union, Malta argued in favour of an internal market for depositaries. As part of the discussions on the Delegated Act, Malta was in favour of a more workable solution with regard to delegation arrangements by an AIFM. At transposition stage, the de minimis requirements, the depositary-lite arrangements and the establishment of an AIF rulebook were the main topics of internal debate. With regard to practical implementation, making sure that the industry was well informed and prepared for AIFMD was the main challenge addressed by the Authority.

The Malta process analysed in this paper demonstrates a pragmatic approach to the AFIMD. However, the implementation of AIFMD is not yet complete and monitoring supervision of compliance with AIFMD would, at this stage, appear to be the final test for the MFSA in this area of regulation. Various mechanisms may be applied to address this final challenge. Requesting regular reporting on the stages of implementation appears to be a sensible solution in order to obtain the required information which would allow the prioritisation of supervisory activity. This will be followed-up by on-site inspections focusing on assessing the extent of proper implementation of the AIFMD by the industry and/or regulatory meetings to examine the implementation from a governance perspective. Nonetheless, as examined in this paper, whichever supervisory mechanisms are in the end implemented, the MFSA will most certainly continue to apply the same pragmatic approach to the AIFMD as it has applied during the process so far.

This article has been published in the IFC Malta 2014 publication, which was issued in March 2014.

TheauthorwouldliketothankProfessorJosephV.Bannister,MFSAChairman,DrDavidFabri,MFSADirectorLegalandInternationalRelationsandMrJonathan Sammut, MFSA Securities and Markets Supervision Unit for their comments and suggestions on the paper.

The views expressed in the paper are solely those of the author at the time of

capital requirement of €125,000 to apply for an authorisation to provide restricted depositary services. This is an area which is experiencing significant interest from the industry and should facilitate the process for private equity and venture capital type funds to be established in Malta. The following diagram depicts the structure of the Investment Services Rulebook pre and post the implementation of the AIFMD:

The green boxes depict the new sections of the Investment Services Rules introduced as a consequence of AIFMD implementation. The changes also include those which were implemented to the Rulebook applicable to collective investment schemes. Although the AIFMD regulates the activity of the fund manager, Malta opted to continue exercising its discretion to regulate the fund. As a consequence, an AIF Rulebook was drawn up and adopted by the MFSA. This new Rulebook provides Maltese/EU AIFMs with a regulatory framework that allows them to establish AIFMD-compliant funds for marketing to professional investors in Malta or across the EU. Moreover, the AIF Rulebook transposes the Directive for the purpose of self-managed AIFs, which in terms of the AIFMD are the AIFM and must ensure compliance with the Directive.

From a practical implementation point of view, the biggest challenge faced by the Authority was that of ensuring a proper understanding of the AIFMD by the industry and the internal preparation for re-authorisation of all existing fund managers. In terms of the Directive, all existing fund managers are required to take the necessary measures to comply with the Directive and are also required to submit an application for authorisation as an AIFM to their national competent authorities by the 22nd July 2014. To address these practical challenges the Authority organised a number of information sessions for the industry and prepared self-assessment questionnaires to be completed and submitted by existing fund managers for authorisation as an AIFM. In order to be in a position to process all relevant applications for re-authorisation, the Authority applied a provisional earlier deadline, 31st March 2014, for the submission of the relevant self-assessment questionnaires by existing fund managers.

The Authority has issued guidance on the setting up of an AIFM in Malta2 and launched a question and answer facility on its website3, which allows the industry to raise queries with the MFSA relating to the practical implementation of the Directive. The industry has found this facility very useful. The Authority has already replied to over 70 queries.

Conclusion

This paper examines the negotiation and implementation process of the AIFMD from Malta’s point of view. At every stage of the process,

INVESTMENT SERVICES ACT

FUND ADMINISTRATORS RULE BOOK

INVESTMENT SERVICES LICENCE HOLDERS RULE BOOKSCIS RULE BOOKS

RETAIL SCHEMES RULE BOOK

PIFs RULE BOOK

NON-UCITS RETAIL SCHEMES

PART B1: MIFIDINVESTMENT FIRMS

PART B2: UCITS FUND MANAGERS

PART B4: CUSTODIANS

PART B3: ALTERNATIVE INVESTMENT FUND

MANAGERS (SEPERATE SECTIONS APPLICABLE

TO DE MINIMIS AND FULL AIFM

UCITS

EXPERIENCED

QUALIFYING

EXTRAORDINARY

AIF RULE BOOK


THE ACCOUNTANT feature

Malta Legislative Process and Legislation • Act20of2013–CompanyServiceProvidersAct(amendingvariouslawsincluding

Investment Services Act) • InvestmentServicesAct(MarketingofAlternativeInvestmentFunds)Regulations,

2013[LN113of2013]• Investment Services Act (Alternative Investment Fund Managers) (Passport)

Regulations,2013[LN114of2013]• InvestmentServicesAct(AlternativeInvestmentFundManagers)Regulations,2013

[LN115of2013]• Investment Services Act (Alternative Investment Fund Manager) (Third Country)

Regulations,2013[LN116of2013]• MFSAInvestmentServicesRulesforInvestmentServicesProviders• MFSAInvestmentServicesRulesforAlternativeInvestmentFunds• MFSAInvestmentServicesRulesforProfessionalInvestorFunds• MFSAInvestmentServicesRulesforRetailCollectiveInvestmentSchemes• MFSA Guidance on establishing an AIFM in Malta• MFSACircularsandConsultationDocumentsontheAIFMDThe above legislation and MFSA related documents are available on the web-site: www.mfsa.com.mt

OtherRelevantMaterial• AIMA,‘TestimonyofWToddGroomeChairmanAIMA–FortheHearingon

PerspectivesonHedgeFundRegistrationbeforetheUSHouseSub-CommitteeonCapitalMarkets,InsuranceandGovernmentSponsoredEnterprises’7May2009

• FloodC,‘AIFMDarrivesbutconfusionreigns’FinancialTimes21July2013• DavisP,‘CustodianbanksbalkatAIFMrules’FinancialTimes6January2013• DeManuelAramendia,‘PrepareforprofoundAIFMDChanges.’FinancialTimes6

January 2013• Jones S, ‘EU rules would see hedge funds go overseas’ Financial Times 21

September2009• KelleherE,‘Alternativesbattleasdirectiveisdelayed’FinancialTimes2December

2013• Kenchington J, ‘Hedge Fund rules absent in 16 EU states’ Financial Times 25 August

2013• MarriageM,‘GermanyBlocksCaribbeanHedgeFunds’FinancialTimes24November

2013• MurphyP,‘Regulators,eatingthemselves’FTAlphaville22August2013• MynersP,‘TheAlternativeInvestmentFundManagersDirective,thePolicyExchange’

HMTreasury11September2009• Articles from the Financial Times are available through the following web-link:

www.ft.com

writing and do not engage the MFSA.1AcopyoftheMFSAInvestmentServicesRulesmaybedownloadedfromtheAuthority’s web-site: http://www.mfsa.com.mt/pages/viewcontent.aspx?id=5062TheMFSAGuidanceNotesareavailablethroughthefollowingweb-link:http://mfsa.com.mt/pages/viewcontent.aspx?id=510 3Queries to the MFSA may be made on the ‘contact form’ which is available through the following web-link: http://mfsa.com.mt/pages/contact.aspx

ReferencesandAdditionalReadingsEuropean Legislative Process and Legislation• Commission–ProposalforaDirectiveoftheEuropeanParliamentandoftheCouncil

onAlternativeInvestmentFundManagersandamendingDirectives2004/39/ECand2009/…/EC.Availableathttp://ec.europa.eu/internal_market/investment/alternative_investments/index_en.htm#maincontentSec5

• Commission–DraftCommissionDelegatedRegulation(EU)Non…/…supplementingDirective2011/61/EUoftheEuropeanParliamentandoftheCouncilwithregardtoexemptions, general operating conditions, depositaries, leverage, transparency and supervision.

• Commission,ConsultationDocument-UndertakingsforCollectiveInvestmentinTransferableSecurities(UCITS)ProductRules,LiquidityManagement,Depositary,Money Market Funds, Long-term Investments, 26 July 2012. Available at http://ec.europa.eu/internal_market/consultations/2012/ucits_en.htm

• Commission–SpeechCommissionerMcCreevyattheMonetaryAffairsCommittee(ECON)oftheEuropeanParliament–01.12.2008.Availableathttp://ec.europa.eu/rapid/press-release_SPEECH-08-665_en.pdf

• Directive2011/61/EUoftheEuropeanParliamentoftheCouncilonAlternativeInvestmentFundManagersandamendingDirectives2003/41/ECand2009/65/ECandRegulations(EC)No1060/2009and1095/2010

• CommissionDelegatedRegulation(EU)No231/2013of19December2012supplementingDirective2011/61/EUoftheEuropeanParliamentandoftheCouncilwith regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision.

• CommissionImplementingRegulation(EU)No448/2013of15May2013establishinga procedure for determining the Member State of reference of a non-EU AIFM pursuanttoDirective2011/61/EUoftheEuropeanParliamentandoftheCouncil

• CommissionImplementingRegulation(EU)No447/2013of15May2013establishingtheprocedureforAIFMswhichchoosetooptinunderDirective2011/61/EUoftheEuropean Parliament and of the Council

• CommissionDelegatedRegulation(EU)No…/..of17.12.2013supplementingDirective2011/61/EUoftheEuropeanParliamentandoftheCouncilwithregardto regulatory technical standards determining types of alternative investment fund managers


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IFAC, IASB, FEE UpdatesGLOBAL UPDATE

Opening a discussion: The Future of Audit and Assurance

As part of FEE’s commitment to promoting a public debate on the areas of audit and assurance, FEE has published a discussion paper on the Future of Audit and Assurance. The paper lays out initial observations which could result in potential longer-term developments in audit, assurance and other services.

FEE firmly believes that the audit profession should have the courage to question itself, especially at times such as this one where there are new developments in audit policy.

Ultimately, accounting and auditing are directed towards achieving more efficient, transparent and trustworthy corporate reporting. The common objective is therefore to improve quality in both corporate reporting and assurance and make audit, assurance and other services the most relevant possible. In order to ensure that we move in the right direction to fulfil this objective, keeping in mind the public interest, we should work towards enhancing quality and promoting the reliability of our services, improving the different forms of auditor communication, and ensuring that practitioners’ services respond to stakeholders’ needs.

As the start of a journey, this paper examines the above areas of development and poses questions. FEE is committed to initiating and encouraging reflection for developing a vision for the future.The paper poses a series of questions to which FEE is seeking answers from stakeholders and interested parties by 30 June 2014.

FEE issues paper on European Public Sector Accounting Standards (EPSAS)

The European Commission has evaluated the suitability of the existing International Public Sector Accounting Standards (IPSAS) for Member States and concluded that developing specific European Public Sector Accounting Standards (EPSAS) would be the way forward in the EU. The European Commission’s initiative has triggered policy debates where a number of issues should be considered, which are highlighted in the FEE issues paper.

FEE issues Factsheet on Recognition of Professional Qualifications in another EU Member State

Recognition of professional qualifications obtained in another EU Member State is essential to establish an internal market for professional services. The FEE fact sheet highlights the main features of the revised Professional Qualifications Directive which will need to be transposed by all EU Member States by 18 January 2016.

Europe’s endorsement of IFRS reform continues

EU Commissioner for Internal Market and Services Michel Barnier has agreed with Philippe Maystadt, former President of the European Investment Bank, that his mission as Special Adviser should be continued in order to supervise appropriate follow-up of the implementation of reforms of the European Financial Reporting Advisory Group (EFRAG). These follow the recommendations provided by Mr Maystadt in this respect in November last year.Commissioner Barnier said: “The EU needs a sound framework for the development of high quality accounting standards. I am happy that Mr Maystadt agreed to continue his special mission to ensure that the system for the adoption of the International Financial Reporting Standards (IFRS) put in place by the European Union is effective and enables the EU to play its full role in the debate. I am confident that the expertise of Mr Maystadt will significantly benefit the swift

implementation of the necessary reforms so that our undertakings and the users of their financial statements can as soon as possible benefit from high-quality international accounting standards.”

In March 2013, Commissioner Barnier mandated Philippe Maystadt to examine ways of reinforcing the EU’s contribution to International Financial Reporting Standards (IFRS) and improving the governance of the European bodies involved in developing these standards. Mr Maystadt presented his final recommendations at the ECOFIN Council meeting on 15 November 2013.

In his report, Mr Maystadt recommended reorganising the current EFRAG to increase its legitimacy and representativeness with a view to strengthening the European Union’s influence in international accounting standard-setting. The report presents the main premises for the reorganisation of EFRAG, however, the detailed implementation of the necessary reforms will require significant co-ordinated efforts from a number of public and private organisations involved in the process. In this respect, the current mission of Mr Maystadt should ensure the reforms will be carried out properly and without delay.

Agreement in trilogue on a European framework on non-financial reporting

The European Parliament and the Council have reached agreement on an amendment to existing accounting legislation to improve the transparency of certain large companies on social, environmental and diversity matters. Companies concerned will need to disclose information on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors.

Large public-interest entities (mainly listed companies and financial institutions) with more than 500 employees will be required to disclose relevant and useful environmental and social information in their management reports. This includes listed companies as well as some unlisted companies, such as banks, insurance companies, and other companies that are so designated by Member States because of their activities, size or number of employees. Companies will be required to disclose concise, useful information necessary for an understanding of their development, performance, position and impact of their activity, rather than a fully-fledged and detailed report. Furthermore, disclosures may be provided at group level, rather than by each individual affiliate within a group.

The draft Directive provides for further work by the Commission to develop guidelines in order to facilitate the disclosure of non-financial information by companies, taking into account current best practice, international developments and related EU initiatives.

As regards diversity on company boards, large listed companies will be required to provide information on their diversity policy, such as, for instance: age, gender, educational and professional background. Disclosures will set out the objectives of the policy, how it has been implemented, and the results. Companies which do not have a diversity policy will have to explain why not. This approach is in line with the general EU corporate governance framework.

This draft Directive represents a first step towards the implementation of the European Council conclusions of 22 May 2013 on the need for further transparency on tax matters and for ensuring country-by-country reporting by large companies and groups. The Commission supports this objective and will endeavour to deliver effectively on the review clause included in this legislation.


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Revision of Parent-Subsidiary Directive on the way

The proposed revised Parent-Subsidiary Directive (PSD) continues its way in the legislative process. Further to the publication of the draft report of the European Parliament’s leading committee, Economic and Monetary Affairs (ECON), the Committee on Legal Affairs (JURI) has now presented its opinion. The indicative plenary sitting date in the European Parliament is 16 April 2014.

FEE welcomes the review of the PSD and its objective of preventing unintended tax benefits arising from the use of hybrid financial instruments by cross-border groups. However, some of the amendments proposed by members of ECON contradict the principle of the PSD to prevent double taxation.

Fourth EU Anti-money Laundering Directive on the way

The European Parliament voted in favour of the joint committee report of ECON and the Committee on Civil Liberties, Justice and Home Affairs (LIBE), adopting the text with a significant number of amendments. The Parliament voted its first reading of this draft legislation, in order to consolidate the work done so far and hand it over to the new elected Parliament. This ensures that the MEPs newly elected in May 2014 can decide not to start from scratch, but instead build on work done during the current term.

The draft law would also require banks, auditors, lawyers, real estate agents and casinos, among others, to be more vigilant about suspicious transactions made by their clients. The aim is to make dodgy deals harder to hide and fight tax evasion. The amended AMLD provides for a risk-based approach, enabling member states to better identify, understand and mitigate money laundering and terrorist financing risks. Parliament also voted on the Transfer of Funds Regulation, which aims to improve the traceability of payers and payees and their assets.

The European Parliament voted its first reading of the draft legislation, in order to consolidate the work done so far and hand it over to the next Parliament. This ensures that the MEPs newly elected in May

can decide not to start from scratch, but instead build on work done during the current term.

IAASB takes a holistic approach in its new Framework for Audit Quality

The International Auditing and Assurance Standards Board (IAASB) has released its new publication, ‘A Framework for Audit Quality: Key Elements that Create an Environment for Audit Quality’. Through this Framework, the IAASB aims to raise awareness of the key elements of audit quality, encourage key stakeholders to challenge themselves to do more to increase audit quality in their particular environments, and facilitate greater dialogue between key stakeholders on the topic.

IFAC SMP Quick Poll: 2013 Year-End Round-Up

The report summarises the results from the latest IFAC SMP Quick Poll, conducted between 15 November and 31 December 2013. Intended to take a snapshot of key issues facing this sector, the poll provides practitioners operating in small- and medium-sized practices (SMPs) around the world the opportunity to share their insights on key trends and developments facing them and their small business clients.SMPs still placed economic concerns at the top of the list of challenges faced by their SME clients, but only by a narrow margin. Similarly, the foremost challenges for SMPs at year-end 2013 were attracting and retaining clients, closely followed by pressure to lower fees. Keeping up with new regulations and standards came in at a distant third.

With regard to the IAASB’s proposed changes to auditor reporting, respondents were generally supportive. While only a small minority thought unlisted entities would voluntarily opt to disclose key audit matters, most agreed with the proposal to require a statement on going concern in all audit reports.

Roughly half the respondents acknowledged the value of integrated reporting to SMEs, even though a majority had not yet received interest in this type of reporting from their clients. And, about half predict that five years from now they will be asked by their SME clients to assist with integrated reporting.

AUDIT POLICY REFORMSGLOBAL UPDATE

A draft agreement with the Council of Ministers on legislation to open up the EU audit services market beyond the dominant “Big Four” firms and remedy auditing weaknesses revealed by the financial crisis was endorsed by Parliament on Thursday 3 April. The draft also aims to improve audit quality and transparency and to prevent conflicts of interest. The European Parliament plenary vote is a welcome end to nearly four years of uncertainty for markets and the profession.

Context

Since his appointment as European Commissioner for Internal Market, Michel Barnier has put the European Union (EU) on a path of triple reform aimed at making the financial sector more resilient. Amongst these proposals was the audit reform to improve the relevance of the audit, de-concentrate the market and reinforce auditor independence. On 13 October 2010, Commissioner Barnier published a Green Paper entitled “Audit Policy: Lessons from the Crisis”. He opened a consultation inviting stakeholders to respond to 38 detailed questions on the implementation of statutory audit within the EU.

After this consultation process, in November 2011, the Commission adopted two proposals for a Regulation on the quality of audits of public-interest entities and for a Directive to enhance the single market for statutory audits. This was the beginning of a legislative debate resulting in a provisional agreement on the Regulation and the Directive between the European Parliament, EU Member States, and the European Commission on 17 December 2013. On 21 January 2014, the JURI Committee voted to adopt both the Regulation and

Directive. The plenary European Parliament adopted the texts on 3 April 2014. The Council of Ministers (‘Council’), as co-legislator, must ratify the same text subsequently. A publication in the Official Journal of the EU is expected by summer 2014.

The Directive, which amends the text of the Statutory Audit Directive (2006/43/EC), contains a series of new and amended requirements governing every statutory audit in the European Union, as well as some requirements applicable to Public Interest Entities (PIEs) only regarding audit committees. The Regulation contains a series of additional requirements that relate only to the statutory audits of PIEs in addition to the general ones stated in the Directive.

Better quality auditing

The legislation requires auditors in the EU to publish audit reports according to International Auditing Standards (ISAs). For auditors of PIEs, such as banks, insurance companies and listed companies, the text requires audit firms to provide shareholders and investors with a detailed understanding of what the auditor did and an overall assurance of the accuracy of the company’s accounts.

Opening up the EU audit market to competition and improving transparency

As one in a series of measures to open up the market and improve transparency, the approved text prohibits “Big 4-only” contractual clauses requiring that the audit be done by one of these firms.


THE ACCOUNTANT news

PIEs will be required to issue a call for tenders when selecting a new auditor. To ensure that relations between the auditor and the audited company do not become too cosy, MEPs agreed on a “mandatory rotation” rule whereby an auditor may inspect a company’s books for up to 10 years, which may be increased by 10 additional years if new tenders are issued, and by up to 14 additional years in the case of joint audits, i.e. when a firm is being audited by more than one audit firm.

The Commission had proposed mandatory rotation after 6 years, but a majority judged that this would be a costly and unwelcome intervention in the audit market.

Independence of non-auditing services

To preclude conflicts of interest and threats to independence, EU audit firms will be required to abide by rules mirroring those in effect internationally. EU audit firms will moreover be prohibited from providing several non-audit services to their clients, including tax advisory services that directly affect the company’s financial statements or services linked to the client’s investment strategy.

Audit reporting

The reporting requirements include the reporting of the most significant risks of material misstatements for PIEs only, the reporting on material uncertainties/going concern issues for all entities. This is broadly in line with the current IAASB proposals on auditor reporting. In addition all statutory audits should therefore be carried out on the basis of the International Auditing Standards adopted by the Commission. In actual fact the Directive introduces a new mechanism for adopting ISAs at European level.

The agreement drew mixed reactions from auditing and accounting organisation leaders.

The EU’s adoption of ISAs was welcomed both by FEE and IFAC. FEE especially welcomes the adoption of ISAs as these are the only set of globally recognised auditing standards; this measure is therefore instrumental to sustaining audit quality. In addition, the stronger role of audit committees will improve corporate governance and the independence of the audit process. The enhancements to the auditor’s report will contribute to a better understanding of the contribution of the auditing profession to the public interest.

Fayez Choudhury, chief executive officer of IFAC said that the global accountancy profession federation welcomes aspects of the European reforms that adopt a globally consistent approach by adopting ISAs. “We strongly support Europe’s step toward adopting International Standards on Auditing. These high-quality international auditing standards are globally accepted, and are currently being used or adopted in over 90 jurisdictions around the world, including many countries in Europe”, said Mr Choudhury, who however criticised other aspects of the legislation, which might have been introduced to ensure its successful passage, and which could lead to regulatory divergence and fragmentation, said the IFAC CEO in a statement released shortly after the EP vote.

FEE expressed concern that many aspects of the legislation will be complicated to implement in practice. “The significant number of Member State options hinders the internal market and the creation of a truly international playing field,” said FEE Chief Executive Olivier Boutellis-Taft. “The reform raises a number of questions that we are committed to help solving. It is time that the whole profession join forces with investors, business and regulators to this end.”

These concerns were echoed by IFAC, who expressed concern that the legislation would create the potential for regulatory divergence. According to Mr Choudhury “we are concerned that other parts of the legislation provide individual member states with options that will create a patchwork of regulation across the union. Not only will Europe be out of step with other major jurisdictions, such as the US and Canada, but member states will potentially be out of step with each other. Just a few years ago, the oft-cited mantra was ‘global problems require global solutions.’ The stakes are high and the rest of the world will certainly be focused on what happens in Europe. Failure

to decide a consistent approach to audit regulation within Europe does not auger well for the chances of agreement among the global community.”

The Institute of Chartered Accountants in England and Wales sees major changes ahead for audit firms from the legislation.

“We are glad we have a conclusion to the three-and-a-half-year-long debate about how audit needs to change across the European Union,” said ICAEW chief executive Michael Izza in a statement. “The legislation adopted today will result in big changes both for auditors and the companies they audit. The new rules will apply to public interest entities, which also includes a number of unlisted companies. Some may not be aware of this and it could be a particular challenge for the smaller companies, which in the past will have relied on their auditors to do a lot of work.”

The ICAEW noted that the changes that have been most debated include the requirement for companies to tender their audit contract every 10 years and rotate their auditor every 20 years, an expanded list of prohibited non-audit services that can be carried out by the external auditor, and a cap on how big a proportion of the audit fee can be made from offering non-audit services.

Next steps

On 14 April 2014 the Council of the European Union has adopted the legislative package on audit policy. To come into effect, the Directive will need to be transposed by the respective Member States into their national laws in order to become effective law.

The next step is the publication in the Official Journal of the European Union which can be expected by mid-May 2014. Member states have two years to adopt and publish the provisions to comply with this Directive after the entry into force of the Directive, namely 20 days after Official Journal of the European Union (OJ) publication. After this deadline, the European Commission may sue the Member States that would fail to transpose.

Unlike a Directive, a Regulation binds everybody throughout the EU and is therefore directly applicable in all EU Member States without the need for any national implementing legislation. Technically speaking, the Regulation comes into effect on the date of entry into force. Nevertheless, mainly due to the fact that the Regulation refers to the Directive, which will need two years to be transposed into national law, there is a two-year delay in the application of most provisions included in the Regulation from the date it enters into force.

Provisions have a two-year delay in the application, except the one regarding the appointment of the auditor (Article 16) that has a three year delay. The timetable for provisions with a two-year delay in the application of the Directive would be:

Final adoption: 15 April 2014; Publication: 10 June 2014; Entry into force: 30 June 2014; Binding effect: 30 June 2016.

Provisions on mandatory audit firm rotation become directly effective (see below).

Transitionalarrangementsfortheprovisiononmandatoryauditfirmrotation.

Transitional arrangements will vary depending on the length of the audit appointment at the date the new legislation comes into force. In case the new legislation would be published on 10 June 2014 and come into force on 30 June 2014.

• If the auditor has been in place for 20 years or more, the first rotation must take place within six years. The first rotation date would be 30 June 2020.

• If the auditor has been in place for between 11 and 20 years, the first rotation must take place within nine years. The first rotation date would be 30 June 2023.

• Otherwise, the new regime will apply two years from the legislation implementation date (30 June 2016). The first rotation date would be 30 June 2026 to reappoint the auditor or to appoint a new auditor.


THE ACCOUNTANTSpotlight on...

SPOTLIGHT ON...ALDO ZAMMIT

ARTICLE BY:Catherine Mallia Bonavia

Answering to an unknown phone number on my mobile has become a must in my profession and this time admittedly, receiving a phone call from the Institute asking me if I’m interested to share my passion and involvement in my village feast with the readers of The Accountant caught me by surprise; although I accepted the invitation enthusiastically.

Before going into the subject I would like to briefly introduce myself to the readers. Basically I graduated as B.A. Hons in Accountancy in 1997 and initiated my career with Grant Thornton as a senior auditor. After obtaining the warrant to practice as a Certified Public Accountant and Auditor I moved to the Tax Compliance Unit within the Ministry of Finance and thereafter joined KSi Malta whereby I was appointed partner to the firm and still occupy this position.

Going back to the subject of this article, I have been involved in my village feast, Our Lady of Mount Carmel in Zurrieq since I was a young boy at the age of ten or even less. At the time my father was also involved in the band club and it only came natural for him to take me with him and participate in the activities organised by the band club. In particular, I recall one of the activities which involved the annual christmas party held for children during which my father and I used to take our home cinema projector (the old 8mm film) and display a couple of cartoon clips on the big screen for the joy of the young ones. At that time this offered us immense delight given that the concept of going to a cinema was less common to what we are accustomed to today.

Years went by and I grew up being part of the band club by attending and volunteering in all areas until the 11th April of 1993. This date marked the formal constitution of the youth section within the band club which provided us a better possibility to work and put forward our

ideas through the appropriate channels. I was appointed chairman of the committee in September 1993 which position I served until September 1996. In the months preceding the formation of the committee, I was also involved in the band club’s project of building two stores that are used to date as the main stores whereby all the street decorations are grouped all together in one place. This project was of particular interest to me given that street decorations have been of enjoyment and self-fulfilment to me from when I was young to date.

Upon the formal institution of the youth committee, we took the planning and building of the stores more seriously and determined that they would officially be opened for the 2012 feast. This materialised and that year all the street decorations were dismantled and taken to their new resting place. One of the main challenges that myself and the other members encountered, involved the restoration of a set of thirteen pedestals that were over forty years old as it was about time that these were to be restored to their former glory. It was during that year that I started learning and grasping the art of gildership and to date I am part of the team that is essentially responsible for such work. From that time onwards I have been involved in the planning and building of another floor within the stores in 1998 and also in the building of two additional floors in 2009. Thus all the street decorations, irrespective if old or new, the yearly restorations thereof and the actual exertion of new projects can be found in one building consisting of five floors.

1993 marked the acquisition of the club’s premises. This event was an immense achievement for all members of the club especially for me since at that time I was chairman of the youth committee. I still remember that date at the notary’s office upon the signing of the sale agreement. At that time it was my first experience to witness


THE ACCOUNTANTSPOTLIGHT ON...

the purchase of property and nowadays I get tired of reading such contracts! The club’s premises were thereafter demolished and rebuilt and I consider myself lucky and proud that I actively took part in each process that was necessary.

At that time as a group of young enthusiasts we joined the confraternity of Our Lady of Mount Carmel in Zurrieq and to date we still take part in the annual procession and others that are held during the year. Apart from the external activities that I am involved in, there is still the devotional element that guides us and helps us out throughout our projects.

As years went by and the club’s members and projects increased, I left the youth committee and joined a new sub-committee responsible

only for the street decorations in 2010 in which I am still actively involved to date. The organisation of the traditional Maltese feast involves plenty of rational, planning and organisation. Only actively involved persons in such band clubs can really know and appreciate what is required and how much time consuming it is to organise the yearly village feast. The one week celebrations that are held every year are the result of a whole year of intensive voluntary work that is carried out by numerous people who cater for all the aspects that constitute our feast. With respect to the street decorations, in particular this is a never ending job and there is no cut off line for. Failure of a single street to light up would mean a failure from our end and a sign of disrespect for our band club.

Since when I was young I took part in the preparations of the street

“street decorations have been of enjoyment and self-fulfilment to me from when I was young to date. ”


THE ACCOUNTANT SPOTLIGHT ON

decorations and it was a must for me during the month of June and July to attend every day to decorate, and throughout the early days of August to eventually dismantle all the setup street decorations. I really enjoyed taking part in these activities and year after year it was always satisfying to attend the feast surrounded by all those decorations, knowing that I have been part of the team that set them up. During the other months I regularly worked to restore the old decorations so that these will be shining ’new’ for the next feast.

Since I have been a member of the street decorations committee there have been tremendous achievements in our band club. Several projects have been terminated albeit there are still plenty in the pipeline. In fact our committee already has plans in store for the next seven or eight years ahead. Such projects require considerable financing and resources and that is why it requires several years for some of them to be completed. Admittedly, even if we had all the finances necessary, plenty of time would still be required in order to complete all intended projects given that the work of craftsmanship takes considerable time and in our country we lack artists that can deliver what is required in acceptable time frames.

Something interesting that I wish to remark to the readers is that in order to assemble all the street decorations that will be used for the feast we take not less than six full weeks and thereafter a couple of weeks to take down everything and put the decorations back in the stores. Many could argue that this is quite a considerable time but one has to consider that most of the work is done after working hours. Since we have invested in various projects throughout the years we had no option but to invest also in machinery. Today our band

club owns two heavy weight lorries, a fork lifter and a tower ladder. Obviously, despite my rather desk oriented career, I still had to learn how to operate this machinery and nowadays we use the equipment efficiently and safely to avoid any accidents.

As I said earlier on, the art of street decorations is never ending. My friends and I have several dreams which with the passing of time have become or are becoming projects. Sketches are made and a vision is established. Thereafter there is a long trip ahead of financing, jotting notes, finding the right people for the project, meetings and discussions, revisions and finally try to make time frames. To this day it is unimaginable to think that we are towards the end of our projects. As time goes by it has become a struggle to maintain what we created and what we have in the pipeline but up till now we are still managing to keep everything updated, keeping abreast, and at the same time give the time and attention needed to our families. Indeed, going back in time, I have no regrets for the sacrifices I made. I would like to finish this article by thanking my fiancée Sabrina for her support and wishing good luck to us since we will tie the knot this year in June and move to our new house which is still in progress at the time!


THE ACCOUNTANTfeature

FEATUREA Future for the Profession - Aiming for public interest, value to the public and public trust

- By Mario P. Galea In looking to the future of our profession one cannot help referring to

the past. As a profession, there are many things that we can be proud of such as our contributions to economies, business, governance, legislation, regulation, financial reporting, assurance and the list is endless.

Sadly there is also a lot which we need to address and help future leaders and members of our profession to overcome. A conscientious examination would remind us of the times we neglected standards, we misunderstood clients and critics, we misconnected with society, and we worked in isolation. We remember the incidents during the life our profession, especially in the last 50 years where firms or members of our profession were implicated and suffered huge liabilities and penalisation. We wonder why it had to be like that. What went wrong in those sad instances?

A close look at our code of ethics and vast literature on the way in which Accountants should conduct themselves would immediately reveal, at best, inattentiveness to the same rules and regulation which our profession itself has set out when it was entrusted with regulating itself.

Self-regulation was taken away from the profession when the biggest case of them all, Enron brought down the largest most respected accounting firm of them all. It was a time which made us realise that we had gone too far in our misdeeds. It was a time which made us all feel embarrassed. Thankfully, the profession responded by intensifying its co-operation with regulators. This awareness and acceptance managed to save the accountancy profession, but is that enough? If we analyse the way forward we will find sufficient insight into what went wrong.

A recent survey conducted by ACCA confirmed the continuing existence of the expectation gap between what we deliver and what the public expects from us. The profession’s future depends on addressing this gap in a concrete manner.

With the Enron case, came also the Sarbanes Oxley Act and the Statutory Audit Directive, which objective was to make the profession more accountable, to dilute our participation in regulation and to increase transparency.

To guarantee a successful future for our profession we need to go back to our roots. This can be defined in a few words. We need to work in the interest of the public, deliver value and as a result secure trust. This necessitates competence, professional skills, and integrity on which our academic qualifications have been centred.

Earlier in April the European Parliament approved the audit reform under three major motives namely a more societal role for the auditor, a strong independence regime and a single market for auditing.This is indeed not radical. Rather than work on our own let us make our profession more open, more present in society, more interested in society than in itself and paid-for interest.

Let us begin by concentrating more on self-awareness. Understand who we are, what we do. We deliver public value. We work in the interest of economies and society benefits a lot from our work. The public at large may not be aware of the extent of this. Therefore we need to communicate.

We, as a profession, have not communicated with the stakeholders and the public at large enough in the past. We need to explain what an Accountant is, what Accountants do, the different ways in which we can and do deliver value, how our role has evolved and the range of skills and specialisation within the profession.

In particular, given the communicative nature of auditing and its role of adding credibility to financial reporting, we should explain what an audit is and what it is not, that it is assurance not insurance; that the assurance is reasonable and the difficulties, limitations and realities of measurement which may be imprecise.

We will show how realistic and objective auditing as well as other services add value to a large variety of sectors not least organisations, companies, businesses, shareholders, other stakeholders, employees, business contacts, economies. How we are a pro-active profession with ideas and solutions discussed at the outset rather than reactive and provide solutions and add value only at the end of the engagement. Let us not use letters of engagement to set limits on our services and creativity but rather they should be an opportunity to demonstrate to our client what we can do for him at the very start of the professional engagement. An opportunity to show how we can work together with clients to achieve valuable objectives and solutions.

Accountants and Auditors are constantly faced with ethical dilemmas. The Accountant is continuously challenged to choose between objective ethical considerations and business interests. The profession needs to continuously assess and address legitimate concerns about ethical issues and conflicts of interest. Accountants need to emerge as leaders when faced with pressure to compromise or to trade off critical attributes against business priorities. The Institutes and other accountancy bodies need to strengthen their support structures for those Accountants who might need assistance in addressing such conflicts or who might need to divulge sensitive information - ‘to blow the whistle’.

Accountants work with people and as such they need to apply soft skills to secure a truly workable and smooth relationship with those with whom they come into contact. The Accountant has to engage in meaningful communication also with non-technical people. We have worked too much amongst ourselves around technicalities, which indeed are a fundamental component of our job, but which at times only serve to isolate us from society. We need to be understood by the public at large if we expect the public to trust us. We need to be aware and cognisant of particular societal factors such as transparency to ensure that users understand what we do. We need to listen more to stakeholders and embrace dialogue. Equally important is the need to better understand and respond to the needs of our employees as well as those trainees who are part of an invaluable talent pool.

The actions, which I am writing about, will not be devoid of challenges and difficulties which I trust will be the subject of another article. Challenges which we should expect to face and overcome as we go along. The objective is too precious to let such challenges stand in the way of our profession’s future.


THE ACCOUNTANT COMMUNITY

The Puttinu Cares Foundation is a charitable NGO that was set up in 2001 with the sole aim of helping families whose children were having treatment for cancer by providing financial, social and support as may be required. Founding members included lay people, parents of patients and hospital professionals working with paediatric cancer patients. Its philanthropic activities are directed by an Executive Committee.

The character, Puttinu is an angel created by Mt. Philip Farrugia Randon. He was sent from heaven to take care of Toninu, a Maltese boy.

THE PUTTINU CARESFOUNDATION

The foundation aims to: • provide social, psychological

and financial help to afflicted families;

• create awareness of paediatric cancer among the Maltese people; and

• serve as a pressure group representing the needs of paediatric cancer patients so that the care that they are given is always of the highest standards.

These objectives do not apply solely to affected children and their families but also to other persons as the Executive Committee may decide.

One of the NGO’s very first projects was to add some colour to the dull ward in the old St. Luke’s Hospital, where paediatric cancer patients were treated.

Thereafter the Foundation worked very hard to provide financial assistance to families of those little cancer patients who need to travel to the UK to receive treatment for cancer and has since grown to support cancer patients being treated at Rainbow Ward and abroad.

This organisation has grown over the years because someone dared to dream that it was possible to make the lives of those families with cancer afflicted children better despite the fact that they are facing a very difficult time in their lives. Many of the families that we have helped over the years, have joined the ranks of the little army behind Puttinu Cares.

Recently the Foundation acquired another piece of land in Sutton, UK. With this latest acquisition, the Foundation will be in a position to offer accommodation to more Maltese families who need to travel for treatment to UK. Indeed the Foundation is aiming to build a block of 15 apartments. The apartment block is presently being built and the whole project is estimated to cost three million pounds sterling (including the purchase of the land). At the time of writing this article €1.9 million still had to be paid.

We are humbled and overwhelmed by the generosity of the people. Puttinu Cares belongs to each and every one of us. Our dream has now become the dream of each

and everyone who contributes in any way.. by donating funds, participating in the annual volleyball marathon, organising fund raising events, and of course to the tireless volunteers.

A friend in need is a friend indeed. Nobody can testify to this saying more than the people who are involved in Puttinu Cares. One mother described Puttinu Cares in the following manner: ‘Puttinu is everything. Puttinu is a ray of light in the darkest of moments.’

The Puttinu Cares Foundation can be contacted by email at [email protected]. The Foundation’s website is accessible on www.puttinucares.org

House bought in Cheam Road to be rebuilt in 12 apartments

House being built up again

House pulled down House nearly ready

Flats currently owned by Puttinu Cares in Martin Court Camden Gardens Sutton



Michelle studied accountancy at the University of Malta and completed her B.A. (Hons.) Accountancy. She continued her studies and completed a MBA degree in Finance from the University of Leicester in 2006. She also obtained a specialised Diploma in Shipping Economics and Operations from the Cambridge Academy of Transport in 2010. Michelle has been working as an auditor for the last 16 years and presently works as an audit manager with Deloitte, Malta. Michelle started her PhD at the School of Management, University of Leicester in April, 2013 and her PhD research focuses on trust, audit quality and professional scepticism. She is also presently a visiting lecturer at the University of Malta.

Michelle Spiteri Bailey

FEATUREEthics, Trust and Auditing - Conceptualising a Tripartite Framework.

A professional

A profession has three important attributes: “the provision of an important service, the possession of special knowledge requiring higher education, and the existence of an organisation” (Bayles, 1986: 27). These attributes enable professional auditors to have an important role in society. Knowledge and expertise give them the privilege to exert a certain amount of control, as investors, banks, employees, governing authorities and others rely on their final opinion to feel reassured that financial statements show a true and fair view. Professionals are also “largely autonomous when acting professionally and self-regulating as a group” (Brein, 1998: 391). A major component of self-regulation for professional auditors is the establishment of a code of ethics by their affiliate professional body. Unfortunately, this important status has been tainted by a litany of scandals that have surfaced over the past years, such as Enron, WorldCom, Adelphia, Global Crossing, Parmalat, and the demise of Arthur Anderson. Inevitably the public is losing trust in the auditing profession, previously held so high by society in general. The European Commission has also intervened and is introducing various measures to reaffirm this lost trust, which on the other hand is infringing on the ability of auditors for self-regulation.

It is vital that the profession itself regains this lost trust and rebuilds its reputation on its historical foundation of ethics and integrity (Copeland, 2005). The following sections will initially revisit the roots and examine the origins of the profession, followed by a reflection on the failings of the profession and finally exploring on ways how to rebuild the trust in auditors which is vital for a sound economic environment. The latter involves an attempt to construct a strategy based on developing a professional culture promoting trustworthiness based on the reaffirmation of the profession’s code of ethics and positive individual ethical values.

The function of auditing

Auditing as we know it today can be traced as far back as the period of the industrial revolution, when the management of a company was transferred from the owners to third party managers. This necessitated the services of an independent auditor to detect any possible errors or fraud (Basu, 2009), thus ensuring that shareholders’ interests were protected. In the mid nineteenth century, audits were initially performed by the individual shareholders, and therefore

principals acted as auditors. It soon became clear that they did not have the skills required, and expert auditors were appointed to act on behalf of the shareholders (ICAEW, 2005). The demand for auditing as a service has been explained in various ways amongst which are: the “Policeman Theory”, “Lending Credibility Theory”, “Theory of inspired Confidence” and the “Agency Theory” (Schilder et al.,1999). An underlying factor common to all theories is the prominence of ethical behaviour, independence, expertise, and trust.

Advancement in technology and increased globalisation widened the rift between owners and managers. This naturally brought with it the increase in importance of auditing to the economy. However over the years auditing seems to have lost this important function of gatekeepers. Instead of improving the efficiency of markets by ensuring that financial statements are trustworthy, auditors are nowadays often viewed as enablers “for their clients’ efforts to mould financial statements to present pretty pictures that aren’t true” (Miller & Bahnson, 2004:14). This was made possible amongst other reasons by hiding behind rule-based principles, rather than following principle-based accounting and auditing practices. In the UK, audit guidelines are not as prescriptive as in the U.S. and the focus is on financial statements to show a ‘true and fair’ view. Nevertheless the UK also had its fair share of scandals, such as Equitable Life, Independent Insurance, and BCCI amongst others (Walsh, 2002).

The Future – A tripartite framework

Easing out of this inept situation will involve a strategy agreed upon by individual auditors and standard setters. A potential strategy encompasses the reinforcement of the code of ethics, the recognition of socially beneficial ethical principles and a conscious effort to re-establish trust. Audit firms have to engage and encourage a positive ethical climate, which defines “an employee’s beliefs of what is viewed as ethically correct behaviour within the organisation” (Kelly et al., 1989: 331). The perceived ethical climate will help individual auditors to identify situations that might involve ethical decision making. The ethical climate will also aid the individual to understand, evaluate, and resolve exposure to any ethical issue encountered (Barnett & Vaicys, 2000).

Auditors and professional accountants have a sound international code of ethics established by the International Ethics Standards Board for Accountants (IESBA), wherein the conceptual



framework is set on the ethical principles of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. The code of ethics therefore makes clear what is considered to be acceptable behaviour to the profession. Existence and awareness is however not enough, audit firms and standard setters have to comprehensively engage in increasing the knowledge base of professional staff. This can be achieved by increasing the awareness and knowledge content of the code of ethics by giving regular formal training to audit professionals, and by introducing audit aids such as checklists and audit program steps on all engagements (Pflugrath et al., 2007), amongst other measures. Thus setting aside the unfounded ideas that the code of ethics is just a marketing stunt and a necessity imposed upon by the affiliate professional body or law. Yet auditors occasionally encounter complex ethical dilemmas and the code of ethics in “their universalised form, cannot cover all eventualities” (Preuss, 1998: 500). In these situations auditors tend to fall on technical knowledge and solutions. However this can lead to the pitfall mentioned previously, and auditors will try to solve their difficulties by adopting a rule based stance to a possibly tricky situation, which is not always the right solution to the issue at hand.

The IESBA code of ethics also specifies that a professional accountant is duty bound to act in the public interest. Furthermore, specifying that a professional accountant’s responsibility should not be focused solely on the needs of an individual client, but shall act in the public interest (IESBA, 2013). This concept should be encouraged by professional bodies and adopted by audit firms, amplifying it to include the moral development of professional staff, through the conscious awareness and adoption of moral ethical theories. A compound model of moral ethics is being suggested invoking ethical ideas of ‘Utilitarian Benefits’ advocated by Jeremy Bentham, ‘Personal Virtues’ encouraged by Plato and ‘Universal Rules’ set by Kant. Utilitarian beliefs emphasize the importance of the greatest good to the greatest number of people (Duska & Duska, 2003). As described by Preuss (1998) utilitarianism is applicable within the accounting context as it tends to link self-interest with moral behaviour and a company’s actions are invariably self-interested. Additionally the weighing of benefit and harm is comparable to profit and loss accounting and therefore likely to be easily understood by auditors. “Virtues are dispositional properties that enable accountants to meet their ethical obligations to employers, clients and the public at large. For instance, in order for an accountant to act objectively in performing professional services, such as auditing the financial statements of a client, the accountant must have the inclination to be impartial and open-minded” (Mintz, 1995: 251). Finally the universal rules set by Kant emphasize actions that will result in the greater good for society. These actions revert to the principle –based foundation of accounting and auditing (Satava et al., 2006), which if followed will steer the professional’s ethical decision making towards the greater good and away from any possibility of self-interest motivated actions.

The concepts of trust and ethics are strongly linked, so much so that ethics is an essential element of trust. Rotter (1967: 444) defined trust as “an expectancy held by an individual or a group that a word, promise, verbal or written statement of another individual or group can be relied upon”. The above mentioned efforts towards establishing a positive ethical climate will definitely aid in restoring trust in the auditing profession. This process will be complete if auditors consciously strive to regain the trust that has been lost. This can be achieved if audit firms visibly engage in trust building activities in addition to their daily professional duty. Efforts have to be directed towards reaffirming the profession’s independence in fact and appearance and restoring their reputation. Emphasis has to be directed towards highlighting their technical capabilities, focusing on offering service quality, and promoting research. Auditors should also consider widening their service base to include other assurance services in addition to auditing, such as sustainability reporting. This would ensure that as a profession they are still relevant, without compromising their independence and capabilities.

Change

Invariably auditors have to change their practices and focus again on the basic principles of the auditing profession. The fundamental ethical principles advocated by the IESBA of: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour, have to act as a foundation for setting an ethical background. Next comes the establishment of an ethical framework which involves setting “norms and principles that serve as guidance for individual actions” (Barlaup et al., 2009: 187). The end result would be trust earned and developed outside regulation, involving leadership and not just processes to be followed.

This article won ‘Best academic essay’ in the Joint Professions for Good and Institute for Business Ethics Writing Awards on how to put ethics and the ‘public good’ back at the heart of the financial auditing process in light of recent scandals and regulatory reform.

References

BarlaupK.,DronenH.I.andStuartI.(2009),‘Restoringtrustinauditing:EthicalDiscernmentandtheAdelphiaScandal’,ManagerialAuditingJournal,24(2):183-203.

BarnettT.&VaicysC.,‘TheModeratingEffectofIndividuals’PerceptionsofEthicalWorkClimateonEthicalJudgementsandBehaviouralIntentions’,JournalofBusinessEthics,27(4):351-362BasuS.K.(2009)FundamentalsofAuditing,DorlingKindersley(India)Pvt.Ltd.BaylesM.D.(1986)‘ProfessionalPowerandSelf-Regulation’,Business&Professional Ethics Journal, 5 (2): 26-46BrienA.(1998)‘ProfessionalEthicsandtheCultureofTrust’,JournalofBusinessEthics,17(4):391-409CopelandJ.E.(2005)‘EthicsasanImperative’,AccountingHorizons,19(1):35-43DuskaR.F.&DuskaB.S.(2003)AccountingEthics:FoundationofBusinessEthics,BlackwellPublishingLtd.,OxfordUKICAEW(2005)‘AuditQuality–AgencyTheoryandtheRoleofAudit’,InstituteofChartered Accountants in England & WalesInternationalEthicsStandardsBoardforAccountants(2013),HandbookoftheCode of Ethics for Professional Accountants; IFACKelleyS.W.,SkinnerS.J.&FerrellO.C.(1989)‘OpportunisticBehaviourinMarketingResearchOrganisations’,JournalofBusinessResearch,18:327-340.MillerP.B.W.&BahnsonP.R.(2004)‘AuditRevolution:FromCompliancetoAdding Value’, Accounting Today, pp. 14 &17.MintzS.M.(1995)‘VirtueEthicsandAccountingEducation’,IssuesinAccountingEducation,10(2)1995:247-267PflugrathG.,MartinovB.N.&ChenL.(2007),‘TheImpactofCodesofEthicsand Experience on Auditor Judgements’, Managerial Auditing Journal, 22 (6):566-589.PreussL.(1998),‘OnEthicalTheoryinAuditing’,ManagerialAuditingJournal,13(9):500-508RezaeeZ.(2004)‘RestoringPublicTrustintheAccountingProfessionbyDevelopingAnti-fraudEducation,Programs,andAuditing’,ManagerialAuditingJournal,19(1):134-148RotterJ.B.(1971)‘GeneralisedExpectanciesforInterpersonalTrust’,AmericanPsychologist, 26(5): 443-452SatavaD.,CaldwellC.&RichardsL.(2006)‘EthicsandtheAuditingCulture:RethinkingtheFoundationofAccountingandAuditing’,JournalofBusinessEthics, 10(2): 271-284SchilderA.,DassenR.&WallageP.(1999)PrinciplesofAuditing–AnInternational Perspective, McGraw-Hill Higher Education.WalshC.(2002)‘NowauditfearshitUK:ButHewittletBigFourCarryonRegardlessAccountancyRules’TheObserver,pp.A3


THE ACCOUNTANT TECHNICAL

TECHNICALIFRS, IAS, ISA UPDATE

IASB begins public consultation on Post-implementation Review of IFRS 3

Earlier this year, the International Accounting Standards Board (IASB) began the public consultation stage of its review of IFRS 3 Business Combinations by publishing a Request for Information (RfI) on experience with, and the effect of, implementing the Standard. The RfI seeks feedback on whether the Standard provides information that is useful to users of financial statements, whether there are areas of the Standard that represent implementation challenges and whether unexpected costs have arisen when preparing, auditing or enforcing the requirements of the Standard.

In addition to publishing the RfI, the IASB will also undertake a range of outreach activities internationally to gather further feedback on the effect of implementing IFRS 3.

Commenting on the review, Hans Hoogervorst, Chairman of the IASB said: “This Request for Information forms an important part of our formal outreach programme. It will be invaluable in helping us learn whether IFRS 3 is being implemented on a consistent basis. The feedback we receive will also help us understand whether any unintended consequences have arisen following its introduction. We look forward to receiving comments from across the IFRS community.”The RfI is open for public consultation until 30 May 2014 and can be accessed via the ‘Comment on a Proposal’ page. Further details of these activities will be published on the IFRS 3 Post-implementation Review project page on the IASB’s website.

IASB publishes proposals as part of Disclosure Initiative

The IASB recently published for public comment an Exposure Draft outlining proposed amendments to IAS 1 Presentation of Financial Statements. The proposal results from one of several short-term

projects under the IASB’s Disclosure Initiative.

Many respondents to the IASB’s Agenda Consultation 2011 asked the IASB to review the disclosure requirements in existing IFRS, to explore ways to improve disclosures. Consequently, in 2013 the IASB started the Disclosure Initiative, a package of several projects aimed at improving the disclosure of financial information. The Exposure Draft proposes narrow-focus clarifying amendments to IAS 1 to address some of the concerns expressed about existing presentation and disclosure requirements and to ensure entities are able to use judgement when preparing their financial statements.The proposed amendments:

• Clarify the materiality requirements in IAS 1, including an emphasis on the potentially detrimental effect of overwhelming useful information with immaterial information.

• Clarify that specific line items in the statement(s) of profit or loss and other comprehensive income and the statement of financial position can be disaggregated.

• Add requirements for how an entity should present subtotals in the statement(s) of profit or loss and other comprehensive income and the statement of financial position.

• Clarify that entities have flexibility as to the order in which they present the notes, but also emphasise that understandability and comparability should be considered by an entity when deciding that order.

• Remove potentially unhelpful guidance in IAS 1 for identifying a significant accounting policy.

XBRL: IFRS Foundation publishes the 2014 annual version of the IFRS Taxonomy

The IFRS Foundation has published the IFRS Taxonomy 2014. The IFRS Taxonomy is a translation of International Financial Reporting Standards (IFRS) into eXtensible Business Reporting Language


(XBRL). The IFRS Taxonomy 2014 is consistent with IFRS as issued by the IASB at 1 January 2014, including Standards published but not yet effective at that date. By providing the IFRS Taxonomy, the IFRS Foundation seeks to address the demand for an electronic standard to transmit IFRS information.

The IFRS Taxonomy 2014 follows a different architecture to the IFRS Taxonomy 2013, with separated modules for full Standards, IFRS for SMEs and IFRS Practice Statement Management Commentary. The IFRS Foundation has published the IFRS Taxonomy 2014 with the updated IFRS Taxonomy Guide and a range of accompanying materials that have been specifically developed to aid understanding and use of the IFRS Taxonomy.

IFRSs coming into force

The following IFRSs and improvements to IFRSs have come into force on Annual periods beginning on / after 1 January 2013:

• Offsetting Financial Assets and Financial Liabilities - Disclosures - Amendment to IFRS 7

• IFRS 10 Consolidated Financial Statements• IFRS 11 Joint Arrangements• IFRS 12 Disclosure of Interests in Other Entities• IFRS 13 Fair Value Measurement• IAS 19 (2011) Employee Benefits • IFRIC 20 Stripping Costs in the Production Phase of a Surface

Mine• Government Loans - Amendments to IFRS 1

May 2012 Annual Improvements to IFRSs

• IFRS 1 First-Time Adoption of International Financial Standards• IAS 1 Presentation of Financial Statements • IAS 16 Property, Plant and Equipment

• IAS 32 Financial Instruments: Presentation• IAS 34 Interim Financial Reporting

Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition guidance

• IFRS 10 Consolidated Financial Statements • IFRS 11 Joint Arrangements • IFRS 12 Disclosure of Interests in Other Entities

The following IFRSs and improvements to IFRSs have come into force on Annual periods beginning on / after 1 January 2014:

• Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

• Novation of Derivatives and Continuation of Hedge Accounting• Amendments to IAS 36 - Recoverable Amount Disclosures for Non-

Financial Assets• IFRIC 21 Levies

Investment Entities Amendments to:

• IFRS 10• IFRS 12• IAS 27

THE ACCOUNTANTTECHNICAL


Carving your path to Success – A practical Approach Lecturer’s Tips – F8 Audit and AssuranceBy: Morgan Carabott – BPP Lecturer for Paper F8

THE ACCOUNTANT STUDENTS

Introduction to Audit and Assurance

F8 Audit and Assurance introduces students to the regulatory framework behind the process of audit and assurance. It deals with both external and internal audit. The main scope behind Audit and Assurance is to give comfort to stakeholders about the reliability of financial information and the internal control environment within an organisation.

Preparing for your Exam

1. Enhance your Knowledge Base

A colleague of mine once said, “ipsa scientia potestas es”. Information is power. Look for information and use it to your advantage. What sort of information? The ACCA webportal (www.accaglobal.com) has a section dedicated to “Technical Articles”. These articles are expertly designed by audit area and are a very good read

2. Strong Command of English

At this day and age, when correcting mock exams I still come across poor use of vocabulary or even worse, sentence structures, where students present literal translations from Maltese to English. Yes, it is a reality.

I strongly recommend you use chapters 8, 12, 13, 14, 15, 16 from the BPP published material to help you build up your dictionary of audit jargon. Chapter 8 outlines audit assertions (what to test) and audit procedures (how to test). Assertions refer to attributes which the auditor intends to test for classes of transactions (Income Statement), Account Balances (Statement of Financial Position) and Disclosures (Notes to the accounts).

A very helpful acronym to help you remember assertions is the word ACCACOVER; accuracy, completeness, cut-off, allocation, classification, occurrence, valuation, existence, rights and obligations. The following mnemonic will help you memorise audit procedures; AEIOU; analytical procedure, enquire and confirmation, inspection, observation, recalculation.

Audit and Assurance is a theory based subject with very minimal computations, this in itself gives it an element of subjectivity. Global pass rates for F8 are highlighted hereunder:

to you as students. Make sure to find time, print one or two articles and read through them.

This paper also makes reference to a number of International Accounting Standards (IAS). You need to be familiar with these standards. I have prepared a table outlining the IASs and the chapters in which you need to apply them.

3. Study All the Chapters

The study text has 19 Chapters, specifically designed to take you through the Audit and Assurance cycle and the relevant regulatory framework.

All chapters have an equal chance of being examined. Chapters 1 to 4 cover the Audit Framework and Regulation. Chapter 5 covers Internal Audit. Chapters 6 to 8 tackle Planning and Risk Assessment. Chapters 9 to 10 deal with Internal Controls. Chapters 11 to 17 discuss in great detail Audit Evidence and Testing. Chapters 18 and 19 cover Review and Reporting.

After revising a chapter, work out questions from your study packs. This will ensure you have a good grasp of the chapter just covered. Do this for all the chapters in your study text. Selective revision will limit the number of questions you can answer and hence reduce your chances of passing this paper.

Dec 2007

43%

June 2008

32%

Dec 2008

43%

June 2009

34%

Dec 2009

40%

June 2010

36%

Dec 2010

38%

June 2011

40%

Dec2011

36%

June 2012

56%

Dec 2012

34%

June 2013

40%

Dec 2013

35%

International Accounting Standard (IAS)

IAS 1 – Presentation of Financial Statements

IAS 2 – Inventories

IAS 10 – Events after the reporting period

IAS 16 – Property Plant and Equipment

IAS 38 – Intangible Assets

IAS 37 – Provisions, Contingent Liabilities and Contingent Assets

F8 Chapter

All chapters

Chapter 13 – Inventory

Chapter 18 – Review and Subsequent Events

Chapter 19 – Audit Report

Chapter 12 – Non-Current Assets

Chapter 16 – Liabilities, Capital and Directors Emoluments



The Moment of Truth – D-Day

1. Time Discipline

In this paper, you should allocate 1.8 minutes for every 1 mark. Therefore, if you have a 20 mark question, you should not spend more than 36 minutes in total.

The 15 minutes reading time should be carefully utilised. Go through the questions in the paper so that you familiarise yourselves with what is waiting for you – jot down short notes or keywords next to each question, this will help you focus and put things into perspective when you get to actually answering the question in full. You can also plan the order in which you are going to address the questions.

Always start by reading the Requirements of the question first and underline or highlight what the examiner is asking out of you – this way you will know what to look for without having to read through the question 3 or 4 times!

2. Presentation

The examiner is your friend and requires your collaboration – How? In the way you present your answers.

Never use chunky, lengthy paragraphs or long breath-taking sentences. Be aware of the meaning of the key verbs used in the paper. Here is a table summarising the verbs used in the question requirements so that you can assess the level of input the examiner is expecting from you.

Now that we have analysed the requirements, let us go through some typical examiner-friendly answers:

In the exam, you may be asked to produce a report to Management, highlighting deficiencies identified in a specific scenario. This can give you a maximum of 2 marks for correctly presenting your answer in the form of a report. A sample of the report can be found in Chapter 10 of your Study Text. Two marks are not worth losing!

3. Wear the Hat of an Auditor

When tackling questions, put yourselves in the auditor’s shoes. A typical question which can put students off track is the following:

“Identify and describe 6 audit risks from the scenario and explain the auditor’s response to each risk” The scenario would state that the company had expanded the number of warehouses it uses to store inventory. Let me illustrate a wrong and right answer to this:

This attribute is also essential when dealing with Professional Ethics (Chapter 4) questions, where you are presented with scenarios and you need to indicate any threats to independence. Make sure you disassociate yourselves from Management – think of what will impose a threat to independence to you in performing your assurance engagement.

4. Stay Composed

Your exam paper is waiting in front of you. Your faces start getting hot from the inside out. Next, beads of sweat start rolling down your forehead. STOP!

Stay composed! You have studied hard and feel confident with the subject. You have mastered skills to tackle these questions. The last thing you need is to get all agitated. Now is your time to shine!

Conclusion

Audit and Assurance will be further examined in one of the Professional Papers – P7. It is therefore imperative that you get the basics right and excel in this Foundation Paper. As a final word of advice – Believe in Yourselves!

Verb

Explain

Describe

Define

Recommend

Discuss

List

Illustrate

Audit procedures / tests

Enquiries

Evidence

Definition and Mark Allocation

Make a point clear, justify a point of view

Give an account of something

Give the meaning of

Advise the appropriate actions to pursue

Critically examine the issue

Provide a list – straight to the point

Explain by using examples

Actions

Questions

Source (eg. Document) and what it proves

Required

List six audit procedures

Discuss the advantages and

disadvantages of outsourcing

Identify and explain threats to

independence... briefly explain how

each threat should be mitigated

Identify inefficiencies in internal

controls, their implication and

suggest recommendations

PRESENTATION

6 bullet points – 1 sentence long

2 columns – with headers

“Advantages” – “Disadvantages”

2 columns – with headers

“Threats” – “Safeguards”

3 columns – with headers –

“Inefficiencies” – “Implication” –

“Recommendation”

WRONG

Management should monitor and

control warehouses in different

locations – [business risk]

RIGHT

Higher Auditor detection risk

due to inventory counts taking

place at multiple locations -

[audit risk]



ACCA STUDENTS’ NOTICE BOARDIMPORTANT DATES MAY

An exam attendance docket will be available from myACCA for the June exams, detailing the exam date, time, venue and the paper/s you are entered to sit for.

In your first year as an ACCA student you will be required to pay an annual subscription if you complete your initial registration before 8 May.

May 8 Online applications for late exam entries must be received by this date for June exams.

JUNE

Exams will be held over an eight-day period in the first and second week as follows:

July

July 15 Requests should be submitted to ACCA for special consideration when marking scripts in respect of the June exam sessions.

ARE YOU READY TO QUALIFY?

You are eligible to become an ACCA member as soon as you have:• completed your exams• completed the Professional Ethics module• achieved 36 months’ practical experience in a relevant role, having

recorded the detail through the ‘work experience’ section of your online My Experience record

and either:

• answered the challenge questions for 13 performance objectives and had these reviewed and signed off by your workplace mentor

or

• can confirm your employer has granted you a Performance Objective exemption because they are an ACCA Approved Employer - trainee development stream, holding gold or platinum level.

So make sure that you:

• Regularly update your PER progress using My Experience. If you don’t you’ll miss the opportunity to receive an invite to become a member quickly and smoothly.

• Keep copies of any documentation relating to your employment and relevant work experience; this may be required for PER audit purposes.

• Complete the Professional Ethics module.• Keep your contact details up-to-date, particularly your email

address, to ensure you receive your invitation to become an ACCA member.

GETTING YOUR INVITATION TO MEMBERSHIP

All you have to do, once you have completed the steps above, is simply wait to receive your invitation. We will track your progress towards meeting the membership requirements then email or write to invite you to become a member as soon as you are ready. There is no need to apply.

STILL WANT TO APPLY?

You can still apply for membership once you have completed the steps above. You can do so online at myACCA or download and complete the application form in the Related Documents section and return it to us.

NOT READY YET?

If you are not yet ready for membership then we are happy to support you as you continue working towards completing your PER. Please remember to keep updating My Experience with your progress.

ARE YOU A NEWLY REGISTERED ACCA STUDENT?

After you have registered to study we will offer you lots of resources and support to help you as you start your journey to achieving your qualification. Below you will find some of the essential things you will need to know once you’ve registered.

MYACCA

myACCA provides you with access to your own personal account with us. You will be provided with your login details by email once your application has been processed.Once you have access to myACCA some of the things you will be able to do are:

• register for and pay for exams• opt to receive exam results by email and text message• pay your annual subscription• update your contact details• access the tools for recording any practical experience you gain

whilst studying ACCA.

MoNDAY 2nd june

thursday 5th june

friday 6th june

monday 9th june

tuesday 10th june

tuesday3rd june

WEDNESDAY 4th june

f5 performancemanagement

f8 audit and assurance

f1 accountant in business

f4 corporate and business law

f3 financialaccounting

f7 financialreporting

f6 taxation

ftx foundations in taxations

ma1 management information

p6 advanced taxation

ma2 managing costs and finance

p7 advanced auditand assurance

p5 advanced performancemanagement

f9 financial management

p3 businessanalysis

p2 corporate reporting

FAB accountantin business

fa2 maintaining financialrecords

p4 advanced financialmanagement

ffm foundations in financial management


We strongly recommend you visit your personal account under myACCA regularly so you do not miss any important information on courses for ACCA students and to ensure you are keeping your details up-to-date.

ESSENTIAL INFORMATION FOR STUDENTS - FACTS

The FACTS booklet is your handbook. The information in this booklet is essential reading as it explains what you need to do as you study and train towards achieving your qualification with us. It contains information on:

• Professionalism• Basics - key information, dates and fees, exemptions• How to study• ACCA exams• Practical experience• Ethics module• Rules and regulations

You will find your FACTS booklet in myACCA under essential information.

If you prefer to find out the information you need by video, we have produced four that are based on the FACTS booklet. You will find information on

• How to get started• How to pass exams• How to get experience• How to be professional.

PRACTICAL EXPERIENCE REQUIREMENTS

Becoming an ACCA qualified accountant does not just involve passing your exams, you also need to complete our Practical Experience Requirement (PER). You can gain your practical experience before, during or after you complete the ACCA exams.

Practical experience is relevant if you are studying for the ACCA Qualification or want to achieve the CAT Qualification under Foundations in Accountancy.

Visit myACCA where you will find:

• your own personal recording tool - My Experience. You will need to use this to record any practical experience you have gained if you are studying for the ACCA Qualification

or

• foundations in practical experience record (FPER) and summary if you are studying for the CAT Qualification.

SELF-CHECK MODULES

Are you part way through your studies but struggling to pass your exams? Be honest with yourself. Could your English and/or Maths skills be a reason?

Then why not complete our self-check modules to get a realistic assessment of your proficiency in English and Maths? If you’re struggling, we have suggested interventions to help you improve.Our self-check modules in English and Maths are optional to complete, free of charge and anonymous so it won’t get written back to your student record and only you will know the results and feedback.

It could help give you the confidence and reassurance you need to feel ready to tackle your exams at the next exam session. And if your English and Maths skills could do with some improvement then no need to worry. There are e-learning modules which are free of charge which you can opt to complete to help improve your maths skills and links to learning materials offered by other providers to help you improve your English skills.

Visit ACCA’s Virtual Learning Centre to access the English and Maths self-check modules http://studentvirtuallearn.accaglobal.com/

THE ACCOUNTANTSTUDENTS