top stories

Comments from ACCA
May 2007

ACCA is pleased to respond to the proposals set out in the consultative document on the above. Our comments reflect the fact that ACCA is both a Recognised Qualifying Body (RQB) and a Recognised Supervisory Body (RSB) under the Companies Act 1989 and issues authorisations to conduct audit work to ACCA members based in the UK and overseas.

We welcome the DTI's general approach to implementing the requirements of the Directive, whereby it proposes to resort to new statutory rules only where necessary and, where possible, to allow appropriate rules to be set at the professional level, either by APB or the professional bodies themselves. With regard to many individual elements of the new Directive, such as professional oversight and quality assurance, the UK is recognised as having led the way, and consequently no material change to current operating practices need occur. On the whole, we consider that modest and for the most part administrative changes are necessary in order to enable the UK to comply with the requirements of the new Directive.

Our responses to those of the specific questions posed in the document on which we have comments to make are set out on the following pages.

Q1 Education and Qualifications

The proposals in this section appear appropriate. As regards the timing of the introduction of the new requirements on the test of theoretical knowledge, we will be happy to liaise with the DTI and the Professional Oversight Board (POB) on this and other relevant matters such as the place of UK financial reporting and auditing standards in the RQBs' syllabi.

Article 10 dealing with practical training is substantially less onerous than the requirements currently in place for RQBs. We understand that the DTI's favoured approach is to retain current arrangements where they exceed the minimum standards set out in the Directive, and we would endorse this approach.

Q2 The auditor register

We do not see why the new provisions should not be brought into effect as soon as possible.

Q3 Implementation of the register requirements

We suggest that the revised requirements for the ‘ UK ' register should go ahead as soon as is practicable and that the provisions regarding third country auditors should follow in due course. But it would appear sensible to incorporate the two sets of information in a single integrated register. 

Q4 Ethics

The proposals in paras 3.15-3.19 appear reasonable to us. It makes sense to make only the minimum necessary changes to the legal requirements and leave matters of detail to FRC/APB and the RSBs. This will ensure that all applicable ethical measures are in one place and the potential for inconsistency is removed.

At para 3.17, the document addresses the requirement in article 23.3 of the Directive for outgoing auditors to provide all relevant information to the incoming auditor. We welcome the proposal to allow this matter to be dealt with in the rules of professional bodies rather than in legislation. It will be vital for there to be a clear and shared understanding of what is and what is not relevant information, one which is recognised as such by both outgoing and incoming auditors. Traditionally, professional rules have insisted that there are limits to the information which an outgoing auditor should be obliged to pass on: this is likely to remain the case. We would argue at this stage that information connected with the outgoing auditor's actions with regard to AML/CTF issues should expressly be excluded from the range of relevant information which is liable to disclosure under article 23.2.

At para 3.19 regarding audit fees, again we believe it would be appropriate to leave this issue to be dealt with by ethical standards issued by APB. 

Q5: Standards and reporting

We generally agree with the proposals in paras 3.20-3.23. In para 3.21, however, the document says that the requirement in article 27 relating to the documentation of the group auditor's review of the audit of the subsidiaries, is only partly covered by current UK auditing standards – ISA 600 will cover the outstanding requirements in due course but is not yet finalised. We are not convinced that the absence currently of a specific requirement on this matter is significant. Group audits are subject to ISA ( UK and Ireland ) and the general requirements for documentation in ISA ( UK and Ireland ) 230 should, in our view, suffice. We do not favour the introduction of changes to ISA ( UK and Ireland ) at this time unless absolutely necessary. With regard to article 28.2, we would not wish to see the prescription of a standard worded audit report by the EU: that would be likely to inhibit good reporting in difficult situations. We would wish instead to see the EU adopt an ISA-based solution on this matter.

Q6 Public oversight, investigations and discipline

We concur with the Government's view that the UK 's existing system of quality assurance and investigations reflects the requirements of the Directive and needs only to be given minimum-level statutory underpinning.

Q10 Options regarding audit committees

We support the Government's proposal to exercise the exemption provided in this article, and would wish to see the minimum regulatory intervention to implement it.

The document says at para 3.53 that ‘the Listing Rules are not in themselves sufficient to implement the Directive, because the Listing Rules leave open the option of having in place no arrangements in relation to these matters at all, under the comply or explain approach'. This is because the provisions of the Code which relate to audit committees are presented on a comply or explain basis – companies are only required by the Code, and by extension the Listing Rules, to say whether or not they have complied with the provisions relating to committees.

In order, therefore, to give effect to the requirements of the Directive regarding audit committees, some additional provision is necessary either in the Code itself, the Listing Rules or elsewhere.

The option of revising the text of the Code so as to accommodate the requirements of the Directive is not addressed in the document but it is, in our view, worthy of consideration as a possible solution to the problem. The revision could be effected by transforming point C.3.1 of the Code into a principle (with which companies are bound to comply) rather than a provision (in respect of which companies are only required to explain whether they have complied with it or not). This solution would have the additional virtue of retaining material on audit committees within the Combined Code, thus ensuring that it remained a comprehensive code for governance: it would be a retrograde step, in our view, for the Code to lose completely the material dealing with audit committees.

We appreciate that the DTI has no power to bring about an amendment of this kind, but note that the FRC itself has accepted that some changes to the Code might be appropriate in the light of anticipated changes to the law. Another potential issue, we recognise, is that text containing focused and detailed requirements on a particular matter might not be seen, by FRC and others, as lending itself easily to presentation as a ‘principle'. There may, accordingly, be objections to the idea on the basis of consistency of drafting approach adopted within the Code.

Of the specific options put forward in the document, we would see as the most appropriate solution that set out in option 1, namely the introduction of rules by the FSA to require listed companies to establish audit committees which meet the minimum standards set out in the Directive. If this were done, we believe it would still be feasible to co-ordinate the substance of such FSA rules with a broadly-framed new ‘principle' of the Code stressing the importance of audit committees to corporate governance.

Q11 The four options for implementing article 41.5

As set out above, we would favour option 1 but consider that the feasibility of amending the Code itself should be explored.

Q14 Exemption of certain classes of public interest entity from article 41.6

We note, from para 3.41, not only that the Government does not propose to go further than the minimum definition of public interest entity but that it has not sought to consult on this decision. We believe this is a public interest issue and should be explored further. We invite the DTI to consider in particular whether certain public interest bodies, such as large mutual or members' organisations as well as Government-owned companies, should have audit committees comprising external, independent members. The implementation of Article 41 in the manner that the DTI is proposing would exempt many of these entities from the audit committee requirements unless they are financial institutions granting credit etc.

Q16 Options for implementing the new prohibition on auditors taking up management positions

Our preference would be for the proposed restriction on auditors taking up management positions to be effected by means of an offence created under the Companies Act. This would serve the interests of clarity. It would also amount to a stronger provision than a professional rule – this would in all likelihood be desirable given the potential for claims to be brought based on principles of restraint of trade and human rights. Additionally, enshrining such a provision in legislation would also be preferable for ACCA, and other RSBs which have members based outside the UK , since it would mean that we would not have to incorporate a UK-specific provision into our rules of professional conduct.

With regard to the proposals on independence and, in particular, the rotation requirement, we agree that it would be sensible to adopt the 7 years on / 2 years off rule as this will be consistent with the corresponding IFAC requirements.

Q17 Third country auditors

We concur with the DTI's proposals for implementing the provisions regarding third country auditors. We would make the point, however, that even if national quality assurance r egimes might appear to be robust in principle, experience suggests that they need to be tested before they can be properly assessed. For example, to assess assurance systems thoroughly, an experienced QA reviewer would need to accompany third country QA reviewers to assess how effectively the review was carried out.

Q18/19 Co-operation with third country auditors

We note that the DTI has not addressed in the document one obvious alternative, which is to not to implement the option to allow auditors to pass documentation directly to national governments. We consider that transfers of information should take place, if absolutely necessary, through POB.

Q20 Disclosure of auditor remuneration

We concur with the Department's proposals to maintain the status quo as regards the disclosure of audit remuneration by small companies and to require medium sized companies to present the expanded range of information on request to the Professional Oversight Board.

Back to top