Enhancing Confidence in Audit - the ICAS response
James Barbour highlights the key points of the ICAS response to the Financial Reporting Council’s (FRC) consultation – Enhancing Confidence in Audit.
FRC Ethical Standard
ICAS broadly welcomes the FRC’s proposed approach to consolidate all of its existing ethical standards for auditors and reporting accountants into one standard (FRC ES) and for this to also apply to public interest assurance engagements as defined. We believe that this does help to reduce the likelihood of a situation where the current Ethical Standards 2-5 may be considered in isolation without regard to the overarching principles which are currently contained in Ethical Standard 1. However, we do have a concern that the inclusion of the Ethical Standard for Reporting Accountant (ESRA) provisions unnecessarily complicates the proposed standard.
Public interest Entities (PIEs)
We welcome the FRC’s decision that the EU Audit Regulation requirements are not being extended beyond PIEs.
However, we are not supportive of the FRC’s proposal to extend, to non-listed PIE audits, the more stringent requirements that are not subject to the FRC’s intended relief. We believe that the FRC’s more restrictive requirements should only apply to those entities which are currently caught by the scope of the FRC’s definition of a ‘Listed entity’. These more restrictive requirements should not be applied to other PIEs.
Definition of Listed Entity
We are supportive of the FRC’s proposal that it will continue to define a listed entity consistent with the definition used in the international standards issued by the IAASB and the international ethical code issued by the IESBA.
We welcome that the FRC does not propose to make any additions to the EU blacklist of prohibited non-audit services for PIEs. Additionally, we welcome the FRC’s decision to introduce the list of prohibited non-audit services verbatim as per the EU Audit Regulation.
We also welcome the fact that the FRC does not propose to utilise the Member State option to apply a more stringent (lower) fee cap relating to the provision of non-audit services. We believe there would be merit in including material to make it clear that the applicability of the cap will not kick-in immediately in June 2016.
We note that the FRC is proposing amendments, in accordance with the Regulation, to avoid resetting the three- year calculation period where interruption arises from a gap year in providing NAS and to apply the cap to firms at the network level. Both of these proposed amendments could be viewed as gold-plating. We accept that the latter is probably justified to prevent the possible circumvention of the cap by the use of other network firms but we question whether it is necessary to include an amendment to avoid resetting the clock. We do not envisage that this would be an issue in practice.
We welcome the approach being adopted by the FRC in conjunction with BIS et al in relation to Article 4 (2) of the EU Audit Regulation i.e. that non-audit services which are required by law includes those which are required by a rule issued by a regulator in accordance with powers granted by legislation, and that these are exempt for the purposes of the calculation of the cap. We believe that this is a sensible and proportionate approach.
Elimination of Term “Chain of Command’
We believe that the proposed new definition “a partner in a position to influence the conduct or outcome of the engagement” will introduce much needed clarity in this respect as it no longer specifies the need for a person in a position of influence to beable to exert “direct” influence, and now includes persons “at each successive level of firm management, supervision or oversight relating to the audit or other public interest engagement, up to and including individuals who have ultimate responsibility for the management or governance of the firm”.
International Standards on Auditing (UK and Ireland)
We recognise the difficulties that the FRC has faced in this respect and are generally supportive of the approach that has been adopted. We would however request that the FRC review the proposed standards to see whether there is scope for simplifying the approach and to ensure consistency of terminology wherever possible.
Guidance on Audit Committees
We are supportive of the FRC’s proposed approach to revise its ‘Guidance on Audit Committees’ (the Guidance), in order to align this with the new requirements for audit committees and changes to the ethical standards for auditors. However, we believe that there is a need to better inform audit committees of the non-audit services which are prohibited. This could best be achieved by replicating the content of the Ethical Standard’s content in relation to the non-audit services which are prohibited in the FRC’s Guidance on Audit Committees. The most appropriate place for inclusion would be in the section on ‘The External Audit Process’ which begins at paragraph 55 of the guidance.