Incorporation of the 8th Directive into UK law

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Incorporation of the 8th Directive into UK law

• Regulation of Companies and their Auditors

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the New UK Regulatory Framework the Competent
Authorities

• Given birth by the Companies (Audit, etc) Act
  2004
• Rôle and objectives of the oversight body, the
  Financial Reporting Council (FRC)
• Rôle of each subsidiary FRC body
• Rôle of Recognised Supervisory Bodies (RSBs)
• Monitoring audit quality
• Reporting

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Background to the changes in the UK regulatory
regime

• The organic growth of regulatory régimes
• A Government report reviewing the UK regulatory
  regime revealed no evidence of serious flaws, BUT
  there were concerns over the independence of
  audit firms from their clients

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Overall regulatory framework

• Professional bodies like ICAS continue to have
  the primary responsibility for the supervision of
  members and member firms conduct
• RSBs regulatory, licensing and disciplinary
  systems constantly reviewed
• FRC to be the new unified independent regulator
  with a remit extended to include
• A more proactive Financial Reporting Review Panel
• An extended Auditing Practices Board
• An independent investigation and discipline
  function
• An independent oversight function
• An Accounting Standards Board subsumed under the
  FRC

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The Financial Reporting Council
FRC
Corporate Governance
AIDB ACCOUNTANCY INVESTIGATION DISCIPLINE BOARD
APB AUDITING PRACTICES BOARD THE
FRRP FINANCIAL REPORTING REVIEW PANEL
POBA PROFESSIONAL OVERSIGHT BOARD FOR ACCOUNTANCY
ASB ACCOUNTING STANDARDS BOARD
AIU AUDIT INSPECTION UNIT
Statutory and non statutory oversight of
accountancy and audit
Developing Financial Reporting Standards ,
reviewing compliance
Investigation Discipline
Developing audit standards and reviewing
compliance audit quality
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The FRCs aim

• is to promote confidence in corporate
  reporting and governance, by ensuring that RSBs
  enforce their own standards and by de-registering
  RSBs that fail to

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arms-length between FRC and RSBs

• The funding of the FRC and its subsidiary bodies
  is one-third to Government, one-third to business
  and one-third to the accountancy (not merely
  auditing) profession

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Financial Reporting Review Panel

• Ensures financial information provided by
  companies complies with relevant reporting
  requirements
• Now proactive (makes about 300 checks p.a.)
• Risk-based approach

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Accountancy Investigation and Discipline Board

• Independent investigation and disciplinary body
  for accountants in the UK
• All members, not just auditors
• Compliant with Article 6 ECHR and Rules of
  Natural Justice
• Focus on Public Interest cases
• Challenge for RSBs is how to gather evidence,
  then be able to use it quickly and effectively

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Auditing Practices Board

• Work on the implementation of International
  Auditing Standards and the development of ethical
  standards for auditors on independence and
  objectivity

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Professional Oversight Board

• In relation to audit
• recognition of accountancy bodies as supervisory
  bodies and offering professional qualifications
• reviewing compliance of supervisory and
  qualifying bodies with statutory requirements
• through the AIU, monitoring the quality of PIE
  audits
• In relation to accountancy
• reviewing the regulatory activities of the
  accountancy bodies in relation to their members

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POBA the main oversight entity

• Key attributes
• gain the professions confidence
• secure a practical understanding of professional
  affairs
• deploy a proactive approach to monitoring
• Enhanced monitoring of audit quality as a result
  of
• its constitutional independence
• being qualitatively engaged with professionals
• Improved communication with standard-setters

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Monitoring the quality of Audits through the AAIU

• AIUs focus is on audits of large entities
• Listed other major public interest entities
  (PIEs)
• Emphasis on quality of audits
• quality of professional judgement applied
• quality of opinion
• group audit opinion, not just work of UK auditor
• greater emphasis on individual audits
• internationality of outreach

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Audit Inspection Unit Coverage

• Examining the 98 firms engaged in Public Interest
  Entity (PIE) auditing
• Visiting the Big 4 every year and the next tier
  approximately every second
• At smaller firms review individual audits
• Professional bodies will continue to monitor
  other (non-PIE) audits

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AIU Approach (1)

• Review audit firms processes and systems
• Audit methodology, compliance with APB technical
  and ethical standards
• Independence/conflict review processes
• Quality review process
• Compliance with auditing regulations
• Attitude to regulation and being regulated

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AIU Approach (2)

• Review of individual audits
• Files mainly selected based on risk-profiling
• Engagement planning and management
• Independence issues
• audit opinion substantiated by the work done?
• extent of the work sufficient, and evidenced on
  file
• significant judgements supportable
• quality and specification of reporting to the AC

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Reporting

• AIU
• Primarily to Audit Firms/Audit Registration
  Committee, POBA
• Referrals to FRRP/AIDB
• Programme of continuous improvement
• POBA
• Project by project
• Annual report including AIU activity,
  concentrating on themes

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Oversight for the next decade

• FRCs updated regulatory strategy is geared to
  influencing the shape and content of
  international regulatory structures, both
  European and worldwide
• Independence may be a moving target, moving
  away from the independence of the oversight
  mechanism to independence of quality assurance
  mechanisms themselves
• The task for Europe and the World Bank is to
  ensure that ethical standards are uniform and
  that and that the appetite and bite of
  regulators is equally uniform

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2010 0versight

• The equivalence of national regulators from
  jurisdiction to jurisdiction will be a source of
  focus and concern for the next ten years
• The temptation simply to replicate what is known
  and what works in jurisdictions such as the UK
  will be difficult for newer adherents to
  international standards to ignore
• BUT heed the warning from history too complex or
  too heavy-handed regulation could stifle the
  domestic markets that its there to assist.

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Conclusion

• Good regulation is proportionate regulation and
  newcomers should not be tempted to copy what is
  done elsewhere, for it may not be necessary
• Statutory structures for the implementation of
  oversight arrangements could be largely
  standardised from jurisdiction to jurisdiction
  but making them work as wholly independent
  mechanisms is hard
• Effective, workable, proportionate and affordable
  oversight structures are a difficult alchemy and
  a real challenge for our ingenuity

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conclusion

• There is no room and no hiding place for simply
  putting in a light-touch régime but the costs
  involved equally suggest that there is no scope
  for the private and professional sectors to
  contribute significantly to it
• Government or other (international) public money
  needs to pick up the tab, both in order to make
  it work, and to ensure independence of operation