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