top stories

Share

An Auditing Practices Board Consultation Paper

Comments from the Association of Chartered Certified Accountants
October 2002

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to comment on the Auditing Practices Board (APB) consultation paper Priorities and Future Work Programme (the Consultation Paper). We welcome this consultation and the recent decision by APB to publish agenda papers and minutes on its website as an appropriate increase in transparency following its transition to a non-statutory independent position.

In our general comments, we set out our views on the way in which APB should address the relative priority of the topics under consideration. We draw a distinction between reactive and proactive work and conclude that certain topics which appear to be highly interesting might not be as necessary as the simple updating of some existing pronouncements.

We also make the overarching point that the planned use of International Standards on Auditing (ISAs) in the European Union (EU) by 2005 must necessarily be the key driver of APB's agenda. This forces us to challenge the proposed approach to certain issues relating to ISAs. For example, we call on APB to issue a UK and Irish equivalent to a recent ISA dealing with the audit of fair values.

While we generally agree with the division of matters into those of higher and lower priority and the intentions of APB with regard to the topics identified for consideration, we draw attention to some areas where we have a different perspective. The most pressing of these relates to the continuing failure of the International Auditing and Assurance Standards Board to develop standards for assurance on sustainability reports. We urge APB to play its full part in promoting this matter internationally.

General Comments

SETTING THE AGENDA


1. The priorities and future work programme of the APB are important matters. While we strongly support APB's decision to issue a consultation paper and appreciate its desire to press ahead with its work programme, we do not believe that a two-month exposure period is sufficient.
   
   
2. The exposure period is at least a month less than is normal for UK Government and other important and complex consultations. In view of this, APB runs the risk either that some responses will be ruled out by the need for organisations to follow their own due processes, which are not geared to such a short time scale, or that responses will be less considered and detailed than would otherwise be appropriate.
   
   
3. As APB has decided to publish its agenda and minutes (an increase in transparency which we fully support), it would also be appropriate to publish the work programme and to invite comments on it on a regular basis. This would not only inform APB's stakeholders but would allow emerging issues to be considered for inclusion in the work programme at an early stage.
   
   INFLUENCING OTHERS
   
   
4. The Consultation Paper draws attention to several instances where APB has sought to influence other bodies which are better placed to address issues which affect auditors but are not wholly within the compass of auditing standards. We support this action by APB as it is important to give an impartial and influential voice in relation to such matters. This acts as a counter to the constant danger that changes in financial reporting, law and regulation may inadvertently adversely affect the ability of auditors to carry out their work and to report clearly their findings.
   
   
5. At a time of transition to ISAs, it is particularly important for APB to promote, both globally and in the EU, the UK and Irish approach to setting auditing standards. As control over UK and Irish standard setting is to be relinquished, it becomes vital to exercise effective influence over the international process of standard setting.
   
   OVERARCHING MATTERS
   
   
6. The Consultation Paper provides a discussion of the background before dealing with topics in two categories: higher and lower priority. Higher priority topics are those on which APB proposes to work, whereas lower priority topics are mostly noted as those where no current work is proposed, for the individual reasons stated in the document. Obviously, the categorisation is a matter on which APB is seeking input from this consultation.
   
   
7. The 'Background' section provides information on two driving forces: 'Enron' and planned use of ISAs in the EU from 2005. Because the latter has a profound influence on the topics dealt with in the remainder of the Consultation Paper, we would have liked APB to have given much greater prominence to the issues arising in relation to this transition. The question following paragraph 7 ('Do you consider APB's plans to adopt ISAs at the start of 2005 to be appropriate?') appears to focus more on the date of adoption than the actions proposed by APB and the policy decisions apparently already taken. We are concerned, therefore, that APB's policy and intended actions will not be properly addressed by those commenting on the Paper.
   
   
8. We support APB's aim to adopt ISAs for 2005 audits and to do so in their entirety rather than to phase them in. A clean transition seems to be the most cost-effective approach and one which will cause least confusion to users of auditors' reports. It is important that the change from existing UK and Irish auditing standards is properly managed and we welcome, therefore, APB's intention to prepare a document setting out the main differences.
   
   
9. We support APB's intention to seek to influence the International Audit and Assurance Standards Board (IAASB) in its work on planned revisions to standards. Where UK and Irish standards are more advanced than ISAs, it is important to promote those standards to the global standard setter.
   
   
10. The document referred to in paragraph 4 of the Paper (Proposal on International Standards on Auditing in the EU, November 2001, European Federation of Accountants) also discusses the expectation that there may be: 'national requirements to perform additional audit procedures and to report on additional matters outside the financial statements'. In relation to such matters it states that: ' . . . a target date of 2005 for implementation of the proposal will allow national standard setters and Member State governments time to identify all additional requirements and then to reduce their number either by dropping them or by persuading the IAPC (now IAASB) of the merits of incorporating them in ISAs'.
    
    
11. This envisages governments removing national requirements (such as, in the UK, reporting by exception on whether proper accounting records had been maintained) as well as national standard setters relinquishing some standards which they do not persuade IAASB to adopt. We welcome APB's intention to consult on the need for supplementary standards when it has become clearer what progress IAASB will have made by 2005.
    
    Higher Priority Topics

12. The higher priority topics section of the Paper deals with one of the key drivers ('Enron') as part of several paragraphs on 'aggressive earnings management'. As stated earlier in our comments (paragraph 7), we would have preferred to see the other key driver, the EU transition to ISAs by 2005, also dealt with as a higher priority topic.
    
    
13. In deciding which topics are higher priority, APB should consider both reactive and proactive actions, although these need not be seen as mutually exclusive. It is necessary to prioritise and react directly to:
    
    
    • changed circumstances such as 'Enron' and its consequences
    • the adoption of ISAs and new or amended legislation or regulation
      and
    • gradual change over time in the business environment, especially where existing standards or other pronouncements could become out of date.
      
      
    In the absence of significant change (such as 'Enron') it is difficult to prioritise work of an updating nature. This is illustrated by paragraph 43 of the Paper which refers to a 1997 Practice Note and concludes that: 'while there may be benefit in consolidating the guidance and updating it as necessary . . . APB does not consider this to be a high priority'.
    
    
14. In September 2001, in our published comments on the recommendations of the Task Force reviewing the operations of the IFAC International Auditing Practices Committee, we made the following recommendation, which we consider is also relevant to APB: 'We believe that electronic publication of all pronouncements is now necessary. As a consequence, holistic updating rather than piecemeal updating becomes not only feasible but desirable in order to avoid the problems associated with inconsistencies caused by timing differences in updating. We recommend that IAPC moves to such a basis at the earliest appropriate time'.
    
    
15. The question of whether APB has the resources to maintain an up-to-date body of pronouncements will be one of the factors which determine the scope and depth of matters included in that body. We expect that there will be considerable change in the work of APB as a result of adoption of ISAs and it will be necessary to work carefully towards a long-term role which properly serves the UK and Irish public interest. An example of the considerable difficulties which arise in this regard is provided by APB's decision not to adopt the Auditing Practices Committee's guidance on internal audit (paragraph 59 of the Paper). This decision is consistent with APB's belief that its remit should not include internal audit. There are, however, currently many factors which suggest that standards would be of considerable benefit to internal audit in the private sector. Internal audit is receiving renewed recognition as an important aspect of internal control and corporate governance. There is a direct link to external audit through the reliance which may be placed on internal audit work. It is in the public interest that relevant standards are set by an independent public interest body and we see no other UK body which could fulfil this role with credibility.
    
    EU TRANSITION TO ISAS BY 2005
    
    
16. We have commented above on APB's plans to adopt ISAs by 2005. In the years before then, there will continue to be significant differences between UK and Irish auditing standards and ISAs. To an extent, such differences have been introduced by APB's failure to implement locally ISAs which were considered to be inappropriate. For example, in our published comments on the 2001 Consultation Paper Aggressive Earnings Management, we expressed concern over delay in implementing ISA 240 (Revised) The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements at a time when international convergence should have been uppermost on APB's agenda.
    
    
17. We agree that a 'clean break' between UK and Irish standards and ISAs should be made. We further suggest that no change should now be made to UK and Irish standards unless that change will continue to be reflected in the post-2005 environment. If APB considers that a matter ought to be included in auditing standards and is not purely a local matter (perhaps arising from legislation), the appropriate course of action is for APB to seek to influence IAASB.
    
    
18. To the extent that IAASB issues new material before 2005, it may be possible to adopt it for local use. Such action would have the advantage of converging UK and Irish standards to ISAs while still being in keeping with the policy of a 'clean break'.
    
    
19. Even where this is not possible, APB should consider promoting debate by adopting exposure drafts of the IAASB as UK and Irish exposure drafts. If this is not done, APB should, nevertheless, use every means possible to enhance local consideration of, and input into, the development of ISAs.
    
    AGGRESSIVE EARNINGS MANAGEMENT
    
    
20. ACCA welcomed the APB Consultation Paper Aggressive Earnings Management as a valuable contribution to the international debate on a subject of global significance. The action now proposed by APB in this area seems to us to be well considered. It will be of continuing importance to monitor developments, seek to influence the major bodies which have responsibility in affected areas and take a global perspective for change.
    
    BUSINESS EMPIRES
    
    
21. Reports of DTI Inspectors, such as on Mirror Group Newspapers plc, have consistently provided a spur to the development of auditing standards. Such reports are not, however, produced on a timely basis and the Consultation Paper rightly points out that many of the Mirror Group issues have already been addressed. While the action proposed by APB appears appropriate, it is not purely reactive; indeed, the action is mainly forward-looking and proactive. As such, when resources are limited, there is a need to judge the work's priority first against the priority of all reactive work and only then against the priority of other potential proactive topics.
    
    
22. ACCA would not wish APB, as a leading standard setting body, to withdraw from proactive work. However, as set out in the Paper, there are currently a large number of high priority reactive topics which must be addressed and we would not wish to see resources used on 'business empires' to the detriment of such work.
    
    STATEMENTS ON INVESTMENT CIRCULAR REPORTING STANDARDS
    
    
23. The involvement of reporting accountants in investment circulars is of considerable importance to capital markets and hence the public interest. We support APB's plans to continue to provide appropriate standards and guidance for reporting accountants.
    
    RESPONDING TO CHANGES IN LEGISLATION
    
    
24. APB has identified the main areas where changes in legislation will affect auditors in the near future and has proposed appropriate responses. We comment below on the balance of that work for two topics. Although the related law has yet to be finalised, we anticipate that there will be a considerable volume of work necessary relating to the responsibilities of auditors of major companies in relation to the Operating and Financial Review. Conversely, money laundering, while also an area of change for auditors, is equally relevant to accountants acting in other capacities and there may be little need for specific guidance to be developed by APB.
    
    
25. There are other legislative changes which APB might have categorised as important in this area. The UK is the first jurisdiction to have a greenhouse gas emissions trading scheme and such trading will both affect financial statements and be accompanied by a need for assurance on the emissions report. Although the European Federation of Accountants (FEE) is raising awareness of the topic and has a discussion paper on assurance aspects in preparation, we see a need for APB to consider the UK implications.
    
    UPDATING GUIDANCE ON THE AUDIT OF REGULATED INDUSTRIES
    
    
26. We agree with APB's plans for updating guidance on the audit of regulated industries as and when the significant industry initiatives have been finalised. We are not sure whether the further intention to delay updating until ISAs have been adopted in 2005 will prove to be a problem and recommend, therefore, that this policy is kept under active review.
    
    Lower Priority Topics
    
    
27. We have suggested earlier in our comments (paragraph 13) the criteria by which the priority of projects should be determined. In the following paragraphs we do not address all the lower priority topics, nor do we seek to put them in priority order. Where we do not comment specifically, we express no adverse view on the approach proposed by APB.
    
    POSSIBLE CHANGES TO SASS BEFORE 2005
    
    
28. We see no reason for APB to delay adopting the recent ISA on the audit of fair values (paragraph 39 of the Paper) as this is not a case of a relatively minor difference between standards (as argued in relation to ISA 570 Going concern). At the exposure draft stage, ACCA represented strongly to IAASB that guidance, not a standard, was best for this matter. However, irrespective of the merit of the ISA, we strongly support its adoption locally as a necessary part of the convergence process.
    
    ENVIRONMENTAL AND SUSTAINABILITY REPORTING
    
    
29. ACCA has been actively involved with the unfolding debate on corporate social and environmental responsibility since 1990. We have launched high profile initiatives working with a host of environmental and sustainability organisations around the world. As well as national reporting award schemes, we have produced a wide range of research and technical reports and publish a free web-based newsletter covering sustainability reporting and accounting issues.
    
    
30. While we agree with APB (paragraph 58 of the Paper) that assurance standards relating to environmental and sustainability reporting are best developed internationally, we see this as a very important matter for the accountancy profession, which even now provides nearly two thirds of the assurance on such reports.
    
    
31. ACCA is aware of the development of standards undertaken by German and Dutch accountancy bodies which also have a standard setting role. IAASB has been left behind, however, while non-accountancy bodies have made progress on developing standards. We believe that APB should, as a minimum, be active in promoting this matter internationally.

Back to top