Chairman's Statement from the Review of Activities 2008-09
Much of APB’s work during the year related to considering:
- what needed to be done to maintain audit quality during the current difficult economic conditions,
- how international auditing and ethical standards should be improved,
- what APB’s future role should be.
Auditing during the recession
The combined effects of the recession and the credit crisis add to the challenges facing companies in preparing financial statements and of auditors in confirming that those financial statements present a true and fair view. Given the amount of economic uncertainty that exists, a particular issue relates to whether an entity is a going concern.
To assist auditors APB issued guidance on going concern issues relevant to the current economic circumstances in December. APB hopes that this guidance will help auditors evaluate whether audit reports need to include ‘emphasis of matter’ paragraphs and help users understand the nature and intention of such paragraphs. It is important that users understand the information value of emphasis of matter paragraphs and are able to differentiate between these and qualified audit reports. More work in this and other areas may be needed and APB has continued to monitor auditing issues arising from the current economic conditions through to the date of this report.
International standards
As described in previous APB reviews there is growing momentum for standards for auditors to be set on an international basis. Recognising the likelihood that European legislation will, in due course, require UK and Irish audits to be conducted in accordance with International Standards on Auditing (ISAs), APB has continued to invest a good deal of its time in influencing their development through contributing to the International Auditing and Assurance Standards Board (IAASB)'s Clarity Project. While global harmonisation of ethical standards is less imminent, APB nevertheless thought it was also important to comment on the International Ethics Standards Board for Accountant’s revisions to the International Federation of Accountants’ Code of Ethics for Professional Accountants (the IFAC Code).
Auditing standards
Over the last three years APB, and its SME audit and Public Sector subcommittees, have invested many hours in preparing responses to draft ISAs and Will Rainey and subsequently Jon Grant (IAASB members) have been active in advocating APB’s views. This exercise has been very beneficial; most of APB’s recommendations for improvement have been accepted and APB is broadly satisfied with both the quality and practicality of the Clarity ISAs that were completed in December 2008. Because APB is of the view that the new ISAs are more rigorous and clearer than the existing ISAs (upon which the current UK and Irish standards are based) it has decided that they should apply to UK and Irish audits for accounting periods ending on, or after, 15 December 2010.
The focus of attention will move in 2009 to European adoption of the ISAs. The EC has been involved in commenting on the draft ISAs and has undertaken some research into the costs and benefits of their adoption in the European Union. It is therefore well placed to move forward with the adoption process and is planning to issue a consultation paper on this in 2009. APB believes that there will be benefit in all auditors within the EU adopting the same auditing standards and will encourage the EC to adopt the ISAs as soon as is possible.
One aspect of the international auditing standards where APB believes that there is a need for further improvement relates to the auditor’s report. UK investors, in particular, believe that the existing auditor’s report contains too much of the ‘wrong', and not enough of the ‘right,' sort of information. APB believes there are opportunities to shorten the existing report and be innovative in how it provides certain information. To facilitate this APB has made changes to ISA (UK and Ireland) 700 and will monitor the extent to which audit firms take advantage of this new flexibility and how investors react to it. APB will also undertake research to explore further the information needs of investors and the practicality of including information to meet these needs in the auditor’s report.
Ethical standards
APB has continued to contribute to improvements in the IFAC Code and hopes that, at some stage in the future, this will be sufficiently rigorous for it to apply in the UK and Ireland. Until that time APB continues to require its own Ethical Standards for Auditors (ESs) to apply domestically.
During 2007 APB conducted a review of the ESs (which were first issued in 2004) by gathering views of interested parties, undertaking its own analysis and drawing on available third party research. Based on this work, APB concluded that the existing ESs are proportionate to their purpose, are comparable with the highest standards internationally, and are working in practice. As a result, APB was able to limit the changes to the revised ESs that were issued in April 2008 to amendments that:
- were required by UK and Irish legislation arising from the implementation of the EU Statutory Audit Directive;
- were necessary in order that the ESs will continue to adhere to the principles of the IFAC Code; and
- added to the clarity of the existing standards and assisted their implementation in practice.
There remained a small number of issues that APB needed to give further consideration to in 2008. These included securitisation services provided by auditors to some of their banking clients, dealing with the threats to independence from restructuring services and the thorny topic of what is the appropriate period for rotation of the audit engagement partner on listed company audits. Responses to the October 2007 consultation paper demonstrated that differences of view persisted between investors, on the one hand, and audit firms and some audit committees, on the other, as to whether the period of rotation for audit engagement partners on the audit of listed companies should be extended from five years (the period established by CCAB in 2003 and perpetuated by APB) to seven years (the period in the IFAC Code and the EU Statutory Audit Directive).
APB has discussed these issues in depth and taken further soundings on them. As a result in March 2009 a consultation paper containing a small number of further proposed changes to the ESs was published. In relation to the rotation period for the audit engagement partner APB proposes to leave it as five years but with some added flexibility to allow audit committees to extend this to seven years provided that this fact, and the reasons for it, are communicated to shareholders.
Changing remit
As explained, much of the work that has, since its inception in 1991, been performed by APB is now being undertaken on an international basis. This gives rise to an important question as to what APB’s future role should be.
APB has debated this on several occasions during the year and this issue has also been discussed by the directors of the Financial Reporting Council Limited. The conclusion we have reached is that there is an important on-going role for APB. While major steps have been taken towards the acceptance of international auditing standards, less progress has been made towards the international harmonisation of standards for other areas within APB’s remit. In particular ethical standards for auditors and standards for investment reporting (SIRs) are likely to remain national for the foreseeable future. APB needs to continue, if for nothing else, to maintain the quality of these.
There is, however, much more that needs to be done and other important activities for APB include:
- Leading further improvements in international auditing standards. Auditing standards need to continue to evolve in response to changing circumstances. APB needs to identify the changing needs, champion them at IAASB and other fora and ensure that appropriate changes to ISAs result.
- Supporting the adoption of the ISAs within Europe. APB needs to continue to work to encourage the EC to adopt the ISAs as soon as is possible and in a manner that does not affect audit quality in the UK and Ireland. Once the ISAs have been adopted in the EU there will, no doubt, be an ongoing role for APB regarding the endorsement of future changes to the ISAs.
- Contributing to other aspects of IAASB’s future work programme. In the next few years IAASB plans to address certain assurance services including standards for reporting on prospectuses, reporting on carbon trading statements and XBRL filings. APB needs to ensure that international standards on prospectus are based on APB’s own standards (the SIRs) and is well placed for providing balanced views on the other projects.
- Keeping auditing guidance current. APB currently has in issue about 50 documents providing guidance on aspects of auditing. During the year APB has updated a number of its Practice Notes and has issued nine Bulletins, many of which deal with changes in companies legislation. This guidance needs to be maintained current and new guidance will continue to be needed on emerging issues.
- Contributing to aspects of the FRC’s future work programme. The FRC issues a number of documents dealing with aspects of financial reporting and governance that do not fit directly into the remit of particular Operating Bodies. Many of these relate, at least in part, to auditing and APB will, as in previous years, make contributions to these. Future FRC projects are likely to include considering whether changes are needed to the Audit Quality Framework and work on the financial reporting and assurance framework for companies that are not publicly accountable.
Personal thanks
I would like to take this opportunity to thank all members of APB and our staff for their tireless efforts in the last year. Several members are rotating off APB in 2009. I would like to thank all of them for their distinctive contributions. I should particularly pay tribute to Lew Hughes, Keith Nicholson and Will Rainey each of whom warrant particular mention. Lew has been a stalwart member of APB and its predecessor bodies since 1990 and has done an outstanding job in reminding us of the particular features of public sector audits. Keith, has made an enormous contribution in relation to financial services, an area that has been especially important over the past years. Will, as already mentioned, served with distinction as an IAASB member for three years.
Richard Fleck
April 2009
Review of Activities 2008-09 (2384kb)
Review of Activities 2007-08 (2mb)
Review of Activities 2006 (1824kb)
Review of Activities 2003-04 (1708kb) - 2004-05-04
Review of Activities 2002 (1673kb) - 2003-02-26
Review of Activities 2001 (3545kb) - 2003-02-25
