New FRC guidance for pension auditors poses challenges
The Financial Reporting Council (FRC) has been consulting on revised guidance for the auditors of occupational pension schemes in the UK. Audit Practice Note 15 (PN 15) was last updated in January 2011 and now needs updated to reflect changes to auditing and accounting standards and legal and regulatory developments.
Supporting the work of pension scheme auditors
We have reservations about the usefulness of draft PN 15 to pension scheme auditors. In our view, the material in the draft is not sufficient to support auditors with a small portfolio of pension scheme audits and it is also unlikely to enhance the audit work of firms with specialist teams of pension auditors.
The status of PN 15 means that auditors must consider and apply the guidance in the Practice Note or, if not, explain how engagement standards have otherwise been complied with.
This requirement does not just set a high bar for auditors, it sets a high bar for the standard of PN 15. With this is mind we are urging the FRC to amend the content of the Practice Note to ensure that it adds value to the audit work undertaken on pension scheme accounts. We have, therefore, several detailed comments on areas for improvement, including:
- Recognising the risk to pension schemes of not complying with new stricter data protection laws, including increased fines for data breaches. The EU’s General Data Protection Regulation (GDPR) comes into force in May 2018 and will apply in the UK.
- Circumstances giving rise to a duty to report to The Pensions Regulator on internal control deficiencies identified during an audit.
- Meeting the requirements of ISA (UK) 540 on auditing accounting estimates, including fair value accounting estimates and related disclosures, calling specifically for guidance on the audit of annuity contracts.
The audit of going concern
Conceptually, the going concern assumption is a poor fit for pension scheme accounts which are stewardship accounts primarily intended to record and report on scheme investments, with the trustees having a fiduciary duty towards the beneficiaries of the scheme.
We are concerned that proposals in the Practice Note could lead to auditors issuing qualified “except for” audit opinions as a matter of routine to comply with ISA (UK) 570 on going concern.
The Pensions Statement of Recommended Practice (FRS 102) (the Pensions SORP) does not expect pension scheme accounts to include, in the accounting policies note, a statement that the accounts have been prepared on a going concern basis. Therefore, we are of the view that PN 15 should align with the recommendations of Pensions SORP which directs pension trustees to make statements of fact (rather than of judgement).
We understand it is not the intention of the FRC to issue guidance which could result in “except for” audit opinions being issued as a matter of routine; therefore, we are recommending that the material in the draft Practice Note is reconsidered to avoid any unintended consequences.
A revised edition of PN 15 should be available later this year