incorporation of the 8 th directive into uk law
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Incorporation of the 8 th Directive into UK law. Regulation of Companies and their Auditors. the New UK Regulatory Framework – the ‘Competent Authorities’. Given birth by the Companies (Audit, etc) Act 2004 R ô le and objectives of the oversight body, the Financial Reporting Council (FRC) - PowerPoint PPT PresentationTRANSCRIPT
Incorporation of the 8Incorporation of the 8thth Directive into UK lawDirective into UK law
Regulation of Companies and Regulation of Companies and their Auditors their Auditors
the New UK Regulatory Framework the New UK Regulatory Framework – the ‘Competent Authorities’– the ‘Competent Authorities’
Given birth by the Companies (Audit, etc) Act 2004Given birth by the Companies (Audit, etc) Act 2004 RRôôle and objectives of the oversight body, the le and objectives of the oversight body, the
Financial Reporting Council (FRC)Financial Reporting Council (FRC) RRôôle of each subsidiary FRC bodyle of each subsidiary FRC body RRôôle of Recognised Supervisory Bodies (RSBs)le of Recognised Supervisory Bodies (RSBs) Monitoring audit qualityMonitoring audit quality ReportingReporting
Background to the changes in the Background to the changes in the UK regulatory regimeUK regulatory regime
The organic growth of regulatory rThe organic growth of regulatory réégimes gimes
A Government report reviewing the UK A Government report reviewing the UK regulatory regime revealed no evidence of regulatory regime revealed no evidence of serious flaws, serious flaws, BUTBUT there were concerns there were concerns over the independence of audit firms from over the independence of audit firms from their clientstheir clients
Overall regulatory frameworkOverall regulatory framework
Professional bodies like ICAS continue to have the primary Professional bodies like ICAS continue to have the primary responsibility for the supervision of members’ and member responsibility for the supervision of members’ and member firms’ conductfirms’ conduct
RSBs’ regulatory, licensing and disciplinary systems RSBs’ regulatory, licensing and disciplinary systems constantly reviewedconstantly reviewed
FRC to be the new unified independent regulator with a FRC to be the new unified independent regulator with a remit extended to include:remit extended to include:– A more proactive Financial Reporting Review PanelA more proactive Financial Reporting Review Panel– An extended Auditing Practices BoardAn extended Auditing Practices Board– An independent investigation and discipline functionAn independent investigation and discipline function– An independent oversight functionAn independent oversight function– An Accounting Standards Board subsumed under the FRCAn Accounting Standards Board subsumed under the FRC
The Financial Reporting CouncilThe Financial Reporting Council
FRCFRC
AIU AIU AUDIT AUDIT
INSPECTION INSPECTION UNITUNIT
AIDB AIDB ACCOUNTANCY ACCOUNTANCY
INVESTIGATION & INVESTIGATION & DISCIPLINE DISCIPLINE
BOARDBOARD
APB APB AUDITING AUDITING
PRACTICES PRACTICES BOARD BOARD
THE
Developing Financial Reporting Standards , reviewing compliance
Investigation & Discipline
Statutory and non statutory oversight of
accountancy and audit
Developing audit standards and reviewing compliance &
audit quality
FRRPFRRP FINANCIAL FINANCIAL
REPORTING REPORTING REVIEW PANEL REVIEW PANEL
POBA POBA PROFESSIONAL PROFESSIONAL
OVERSIGHT OVERSIGHT BOARD FOR BOARD FOR
ACCOUNTANCYACCOUNTANCY
ASB ASB ACCOUNTING ACCOUNTING STANDARDS STANDARDS BOARD BOARD
Corporate Governance
The FRC’s aimThe FRC’s aim
is to promote confidence in corporate is to promote confidence in corporate reporting and governance, by ensuring that reporting and governance, by ensuring that RSBs enforce their own standards and by RSBs enforce their own standards and by
de-registering RSBs that fail to de-registering RSBs that fail to
‘‘arms-length’ between FRC and arms-length’ between FRC and RSBsRSBs
The funding of the FRC and its subsidiary The funding of the FRC and its subsidiary bodies is one-third to Government, one-third bodies is one-third to Government, one-third to business and one-third to the to business and one-third to the accountancy (not merely auditing) accountancy (not merely auditing) profession profession
Financial Reporting Review PanelFinancial Reporting Review Panel
Ensures financial information provided by Ensures financial information provided by companies complies with relevant reporting companies complies with relevant reporting requirementsrequirements
Now proactive (makes about 300 checks Now proactive (makes about 300 checks p.a.) p.a.)
Risk-based approachRisk-based approach
Accountancy Investigation and Accountancy Investigation and Discipline BoardDiscipline Board
Independent investigation and disciplinary body for Independent investigation and disciplinary body for accountants in the UKaccountants in the UK
All members, not just auditorsAll members, not just auditors Compliant with Article 6 ECHR and ‘Rules of Compliant with Article 6 ECHR and ‘Rules of
Natural Justice’Natural Justice’ Focus on ‘Public Interest’ casesFocus on ‘Public Interest’ cases Challenge for RSBs is how to gather evidence, Challenge for RSBs is how to gather evidence,
then be able to use it quickly and effectivelythen be able to use it quickly and effectively
Auditing Practices BoardAuditing Practices Board
Work on the implementation of International Work on the implementation of International Auditing Standards and the development of Auditing Standards and the development of ethical standards for auditors on ethical standards for auditors on independence and objectivityindependence and objectivity
Professional Oversight BoardProfessional Oversight Board
In relation to audit:In relation to audit: recognition of accountancy bodies as supervisory recognition of accountancy bodies as supervisory
bodies and offering professional qualificationsbodies and offering professional qualifications reviewing compliance of supervisory and qualifying reviewing compliance of supervisory and qualifying
bodies with statutory requirementsbodies with statutory requirements through the AIU, monitoring the quality of PIE auditsthrough the AIU, monitoring the quality of PIE audits
In relation to accountancy:In relation to accountancy: reviewing the regulatory activities of the accountancy reviewing the regulatory activities of the accountancy
bodies in relation to their membersbodies in relation to their members
POBA – the main oversight entityPOBA – the main oversight entity
Key attributes Key attributes
– gain the profession’s confidence gain the profession’s confidence – secure a practical understanding of professional affairssecure a practical understanding of professional affairs– deploy a proactive approach to monitoringdeploy a proactive approach to monitoring
Enhanced monitoring of audit quality as a result ofEnhanced monitoring of audit quality as a result of
– its constitutional independenceits constitutional independence– being qualitatively engaged with professionalsbeing qualitatively engaged with professionals
Improved communication with standard-setters Improved communication with standard-setters
Monitoring the quality of Audits Monitoring the quality of Audits through the AAIUthrough the AAIU
AIU’s focus is on audits of large entities AIU’s focus is on audits of large entities Listed + other major public interest entities (PIEs)Listed + other major public interest entities (PIEs)
– Emphasis on quality of audits:Emphasis on quality of audits:quality of professional judgement appliedquality of professional judgement appliedquality of opinionquality of opiniongroup audit opinion, not just work of UK auditorgroup audit opinion, not just work of UK auditorgreater emphasis on individual auditsgreater emphasis on individual audits‘‘internationality’ of outreachinternationality’ of outreach
Audit Inspection Unit CoverageAudit Inspection Unit Coverage
Examining the 98 firms engaged in Public Examining the 98 firms engaged in Public Interest Entity (PIE) auditingInterest Entity (PIE) auditing
Visiting the Big 4 every year and the next Visiting the Big 4 every year and the next tier approximately every second tier approximately every second
At smaller firms review individual auditsAt smaller firms review individual audits
Professional bodies will continue to monitor Professional bodies will continue to monitor other (non-PIE) auditsother (non-PIE) audits
AIU Approach (1)AIU Approach (1)
Review audit firms’ processes and systemsReview audit firms’ processes and systems– Audit methodology, compliance with APB Audit methodology, compliance with APB
technical and ethical standards technical and ethical standards – Independence/conflict review processesIndependence/conflict review processes– Quality review process Quality review process – Compliance with auditing regulationsCompliance with auditing regulations– Attitude to regulation and being regulated Attitude to regulation and being regulated
AIU Approach (2)AIU Approach (2)
Review of individual auditsReview of individual audits– Files mainly selected based on risk-profilingFiles mainly selected based on risk-profiling– Engagement planning and managementEngagement planning and management– Independence issuesIndependence issues– audit opinion substantiated by the work done? audit opinion substantiated by the work done? – extent of the work sufficient, and evidenced on extent of the work sufficient, and evidenced on
filefile– significant judgements supportablesignificant judgements supportable– quality and specification of reporting to the ACquality and specification of reporting to the AC
ReportingReporting
AIUAIU– Primarily to Audit Firms/Audit Registration Primarily to Audit Firms/Audit Registration
Committee, POBACommittee, POBA– Referrals to FRRP/AIDBReferrals to FRRP/AIDB– Programme of continuous improvementProgramme of continuous improvement
POBAPOBA– Project by projectProject by project– Annual report including AIU activity, Annual report including AIU activity,
concentrating on themesconcentrating on themes
Oversight for the next decadeOversight for the next decade
FRC’s updated regulatory strategy is geared to influencing FRC’s updated regulatory strategy is geared to influencing the shape and content of international regulatory the shape and content of international regulatory structures, both European and worldwidestructures, both European and worldwide
‘‘Independence’ Independence’ may may be a moving target, moving away from be a moving target, moving away from the independence of the the independence of the oversightoversight mechanism to mechanism to independence of independence of qualityquality assuranceassurance mechanisms mechanisms themselves themselves
The task for Europe and the World Bank is to ensure that The task for Europe and the World Bank is to ensure that ethical standards are uniform and that and that the ethical standards are uniform and that and that the ‘appetite’ and ‘bite’ of regulators is equally uniform‘appetite’ and ‘bite’ of regulators is equally uniform
2010 0versight2010 0versight
The ‘equivalence’ of national regulators from The ‘equivalence’ of national regulators from jurisdiction to jurisdiction will be a source of focus jurisdiction to jurisdiction will be a source of focus and concern for the next ten yearsand concern for the next ten years
The temptation simply to replicate what is known The temptation simply to replicate what is known and what works in jurisdictions such as the UK will and what works in jurisdictions such as the UK will be difficult for newer adherents to international be difficult for newer adherents to international standards to ignorestandards to ignore
BUTBUT heed the warning from history: too complex heed the warning from history: too complex or too heavy-handed regulation could stifle the or too heavy-handed regulation could stifle the domestic markets that it’s there to assist. domestic markets that it’s there to assist.
ConclusionConclusion
Good regulation is proportionate regulation and Good regulation is proportionate regulation and newcomers should not be tempted to copy what is newcomers should not be tempted to copy what is done elsewhere, for it may not be necessary done elsewhere, for it may not be necessary
Statutory structures for the implementation of Statutory structures for the implementation of oversight arrangements could be largely oversight arrangements could be largely standardised from jurisdiction to jurisdiction but standardised from jurisdiction to jurisdiction but making them work as making them work as wholly independent wholly independent mechanisms is hardmechanisms is hard
Effective, workable, proportionate Effective, workable, proportionate and affordableand affordable oversight structures are a difficult alchemy and a oversight structures are a difficult alchemy and a real challenge for our ingenuityreal challenge for our ingenuity
conclusionconclusion
There is no room and no hiding place for simply There is no room and no hiding place for simply putting in a light-touch rputting in a light-touch régimeégime but the costs but the costs involved equally suggest that there is no scope for involved equally suggest that there is no scope for the private and professional sectors to contribute the private and professional sectors to contribute significantly to it significantly to it
Government or other (international) public money Government or other (international) public money needs to pick up the tab, both in order to make it needs to pick up the tab, both in order to make it work, work, andand to ensure independence of operation to ensure independence of operation