Chairman's Statement from the Review of Activities 2009-10
As I have described in previous APB Annual Reviews there is continuing momentum for standards for auditors to be set on an international basis. APB has therefore continued to spend a good deal of its time in influencing the work of the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA). We have also been involved in the work of the European Commission (EC) in relation to the possible adoption of the International Standards on Auditing (ISAs) under the Statutory Audit Directive.
This international perspective has influenced all of APB's work in the year and most especially in relation to our major projects relating to:
- Updating UK and Irish auditing standards for the new Clarity ISAs issued by IAASB,
- Considering how auditor’s reports can be improved, and
- Deliberating on aspects of auditor independence including when consulting on the Treasury Select Committee’s concerns regarding auditors conducting non-audit work.
Auditing standards
Over the last four years much of the IAASB’s efforts were directed towards its “Clarity Project" which was designed to improve the overall readability and understandability of ISAs through structural and drafting improvements. As part of this project a number of the individual standards were revised to make them more rigorous. One of the prime objectives of this work was to make the ISAs suitable for adoption by the EC.
During this period APB, and its SME Audit and Public Sector subcommittees, have invested many hours in preparing responses to draft ISAs and contributing in other ways. This exercise has been very beneficial; most of APB’s recommendations for improvement have been accepted and APB is satisfied with both the quality and practicality of the Clarity ISAs that were completed by IAASB in December 2008.
During 2009 APB issued exposure drafts of new ISAs (UK and Ireland) which comprised the new ISAs as issued by IAASB supplemented by a small amount of additional material specific to the UK and Ireland. The new ISAs (UK and Ireland) were finalised in October 2009 and will apply to audits in the UK and Ireland for accounting periods ending on or after 15 December 2010. To help auditors implement the new standards, we have published a paper that summarises the main changes in the new standards and have updated our guidance on audit documentation on smaller audits. During 2010 we will update our other Practice Notes.
During 2009 the EC consulted on whether to adopt the ISAs. Responses were generally supportive of this and APB hopes that there will be sufficient momentum at a political level for the EC to adopt them in due course.
Auditor’s report
The one area where APB has decided to diverge from international standards is in relation to the auditor’s report. Over recent years a number of UK investors have observed that the existing auditor’s report contains too much of the ‘wrong’, and not enough of the ‘right,’ sort of information for it to be of value to them. In response, in March 2009, APB issued ISA (UK and Ireland) 700 (Revised) and has since then been undertaking research to explore further the information needs of investors.
While based on the international standard, ISA (UK and Ireland) 700 (Revised) provides options on how to reduce the amount of ‘boiler plate’ wording in an auditor’s report. We will monitor the extent to which audit firms take advantage of this new flexibility and how investors react to it. This information will be of value to IAASB as it considers whether there is a need to change ISA 700 and in Europe as the EC determines its requirements relating to auditor reporting.
Ethical standards
Auditor independence remains a topic of considerable interest in the UK and Ireland and APB has been active in 2009 responding to a number of issues. In particular, in May 2009 the Treasury Select Committee, in its report entitled ‘Banking Crisis: reforming corporate governance and pay in the City,’ raised concerns about non-audit services jeopardising auditor independence. This is not a new issue, indeed APB has considered this on a number of occasions in recent years. Nevertheless, APB issued a consultation paper in October 2009 on whether there should be a general prohibition on audit firms conducting non-audit work for the companies that they audit. A large number of responses were received. These. indicated that:
- Non-audit services should not be completely prohibited - companies need flexibility to determine from whom to buy non-audit services;
- APB’s current Ethical Standards strike the right balance and do not need significant revision;
- Although audit committees are actively involved in considering issues related to auditors providing non-audit services, annual reports need to contain more information about their policies and the reasons for engaging the auditor; and
- Disclosures of fees for non-audit services in the financial statements should be improved.
The consultation process has indicated that there continues to be a perception that non-audit services adversely impact audit independence. APB believes that the most useful initiatives at this time will be to improve the frameworks for the disclosure of fees paid to audit firms and the work undertaken by audit committees. Respondents also indicated a number of areas in which APB’s Ethical Standards for Auditors (ESs) could be improved. To address these concerns APB is working on changes to the ESs. These will be issued for comment in the summer. The exposure draft will also deal with a number of other issues that have been identified by the FRC’s audit inspection activities as well as a number of relatively detailed matters that APB consulted on in March 2009 but did not action pending the responses to the wider consultation on non-audit services.
During 2009 APB changed the standards relating to the rotation period of the audit engagement partner on listed companies. While the basic requirement remains that listed company engagement partners should rotate after 5 years, revisions to ES3 allow the audit committee of listed companies the ability to agree an extension of the partner rotation period where this is necessary to safeguard audit quality and there is disclosure of the decision, and the reasons for it, in the company’s annual report. In addition, changes were also made in respect of the rotation period for engagement quality control reviewers and further guidance was included on factors affecting the significance of the threat to independence where other partners and senior staff are in senior positions for a long period of time.
Some members of the audit profession believe that APB should abandon its ESs and adopt the international Code of Ethics. APB does not support this view. We consider that it is important to the quality of audit in the UK and Ireland, and to investor confidence, that we have the flexibility to respond to national issues on a timely basis. Furthermore, many of the issues we are addressing are closely related to particular aspects of UK and Irish arrangements for corporate governance. While there is an important role for international standards on auditor independence, and that is why APB has continued to encourage IESBA to make improvements in its Code of Ethics, it is likely that APB will continue to require its own ESs to apply domestically for the foreseeable future.
Current issues
The financial crisis has raised a number of issues which affect APB’s work:
- Many have noted that the audit of the financial statements of financial institutions failed to forewarn, or prevent, the financial crisis and this has led some commentators to call into question the value of the audit,
- There has been concern about whether auditors exercise sufficient scepticism when auditing valuations and estimates, including for financial institutions, those related to fair values and impairments, and
- There is ongoing debate as to whether the audit report could be changed to include more information of relevance to investors and other users of financial statements.
These are important issues which will be debated in various fora. The APB will play its part by contributing to these debates and publishing discussion and policy papers to help inform them.
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. Three longstanding members are rotating off APB in 2009 and I would like to thank them for their distinctive contributions. Graham Pimlott has done an outstanding job in bringing an audit committee perspective to our work, especially on auditor independence. Minnow Powell has helped to ensure that our work is both thorough and practical and has always been able to add some humour to our debates. Tom Troubridge has made an enormous contribution in relation to reporting accountants’ work on prospectuses and will continue to chair our Investment Circular sub-committee.
We are also seeing a change of role for Jon Grant within the FRC. Jon was appointed APB’s first technical director in 1996 and since then has been the focal point for most of our activities. Much has been achieved by APB in those 14 years and much of the credit for this should go to Jon. I am delighted that we will not be completely losing his experience as he will still attend APB meetings in his capacity as a member of IAASB.
However, life moves on and the new executive director, Marek Grabowski, has joined us from PricewaterhouseCoopers. He has, I believe, absolutely the right qualities to lead APB forward into a new era and I greatly look forward to working with him in his new role.
Richard Fleck
June 2010
Review of Activities 2009-10 (1241kb)
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
