The Audit of Registered Social Landlords in the UK
The Auditing Practices Board
Comments from ACCA
May 2003
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the proposed Practice Note on the Audit of Registered Social Landlords in the UK (the draft Practice Note). These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Committee and our Social Housing Panel.
The Practice Note generally provides appropriate guidance for auditors of registered social landlords. There are sector specific areas, however, for which further guidance should be provided, these are:
- the role of the regulatory bodies
- the significance of debt financing
and - the respective roles of the board and executive management.
We consider that, before including such an important statement in the Practice Note, the Auditing Practices Board should put its statement that "auditors do not have a duty to consider materiality in relation to the possible expectations of secondary stakeholders" out to wider general public and professional debate than the current consultation exercise.
General Matters
Materiality and audit
Paragraph 78 of the draft Practice Note makes the strong statement that "auditors do not have a duty to consider materiality in relation to the possible expectations of secondary stakeholders". We believe that this has wide relevance in terms of general auditing practice and extends the Auditing Practices Board's guidance beyond that previously included in published documents. For these reasons, we believe that it should be subject to far wider public debate than will be achieved by inclusion in the draft Practice Note.
The role of regulatory bodies
The role of the regulatory bodies is particularly significant in the registered social housing sector. For this reason, paragraphs 21 and 28 of the draft Practice Note, which refer to this topic, should be given additional prominence and may need to be expanded to explain the significance of this relationship for the auditor. In addition, this paragraph should refer to the relevant appendices of the draft Practice Note which provide additional detail on this subject; in turn, these appendices could also refer to the more important publications issued by the regulatory bodies and provide their contact details (including their Internet addresses).
The significance of debt financing
Paragraph 24 of the draft Practice Note refers to the significance of debt financing for registered social landlords; it does not, however, suggest what the relevance of this may be for the audit. In addition, paragraph 24 refers to medium term financial forecasts, but these are not referred to in the section of the draft Practice Note on SAS 130: The Going Concern Basis in Financial Statements.
Directors
Directors of registered social landlords have different roles to those of a limited company; this is because neither members of the management team nor any employees of the organisation can be members of a registered social landlord's board. This distinction should be clearly explained in the section on directors at paragraph 30 of the draft Practice Note.
For this reason, we consider that the preferred definition of company directors should be "those charged with governance" of the company. We believe that this definition is preferable to the one used in paragraph 30 of the draft Practice Note.
Audit committees
Audit committees play significant roles in the governance of registered social landlords. This is relevant to their auditors. The regulatory bodies have also issued substantial guidance on audit committees. For these reasons, this topic should be covered in the introduction to the Practice Note. At present, audit committees are first referred to in paragraph 34 on SAS 110: Fraud and Error.
Inclusion of background notes
Background notes on all the Statements of Auditing Standards which are considered to require special consideration have been included in the draft Practice Note. These background notes are standard ones and are also used by the Auditing Practices Board in, for example, its Practice Note on the Audit of Charities, issued last year. The background note on SAS 120: Consideration of Law and Regulations does not, however, include the fourth paragraph which appears in the Charities Practice Note.
In addition, several of the sections on individual SASs in the draft Practice Note include general notes highlighting the main points of the SAS. In many cases, these notes are not now needed as the background notes cover the same ground. The draft Practice Note has yet to be adequately edited to account for this change.
Other information containing audited financial statements
We do not consider that the reference to the Auditors' Code in the section on SAS 160: Other Information in Document containing Audited Financial Statements is relevant or useful at this time as the status of the Code is being reconsidered separately.
The last part of paragraph 69 indicates that SAS 160 does not apply where the annual report is "an entirely separate document" from the financial statements and audit report. The problems with this statement are the different interpretations which are possible and the subsequent risk of audit liability. Thus, it may be appropriate for the Practice Note to suggest that, even when these documents are issued separately, auditors may wish to consider whether a registered social landlord's annual report is consistent with its financial statements.
Glossary
Readers who are new to the social housing sector would undoubtedly find a glossary helpful; we recommend that one is provided as in the recently issued Practice Note on the Audit of Charities.
Proof reading
The draft Practice Note has numerous typographical and grammatical errors and in some places the material lacks clarity. Although we have not carried out a detailed review for such matters, we have provided separately a document setting out suggested improvements.
Detailed Points
Further explanation of certain terms in the context of social housing
The first bullet point of paragraph 11 of the draft Practice Note refers to "the rules� of the RSL" without providing an explanation of what these rules may be. "Rules" in the context of a registered social landlord could usefully be explained in a glossary (see also paragraph 11above) or the text itself should be expanded.
The penultimate bullet point of paragraph 11 refers to "generally accepted standards of performance and propriety". There should be some reference to what these may be.
Paragraph 12 refers to the legal source for defining those who are responsible for ensuring compliance with accounting requirements. This paragraph does not explain what implication this may have for the auditor of a registered social landlord.
Financial reporting requirements
Paragraphs 15-18 on financial reporting requirements could usefully refer to simplified accounts, tenants' reports and other possible financial reports which may be produced by a registered social landlord. Such references could also be made in the section on SAS 160 at paragraphs 68-72 of the draft Practice Note.
Inherent risks
Paragraph 93 refers to what are termed "inherent risks". The risks listed are in fact business risks which are commonly encountered by registered social landlords. The draft Practice Note is, therefore, not using the term "inherent risks" in its strict technical sense. We suggest that the term "business risks" replaces "inherent risks".
Management representations
<Paragraph 119 refers to management representations being "of particular relevance" as the board members of registered social landlords serve primarily on a voluntary basis. The significance of this for the auditors of these organisations should, however be properly explained.
Related parties
The section on SAS 460: Related Parties could usefully be extended to deal with the issue of tenant representatives on the board of the registered social landlord.
This section of the draft Practice Note also refers to the definition of "key management" contained in International Accounting Standard 24 without indicating that there is no suitable UK definition of this term.
Adequate and effective internal audit
Paragraph 131 refers to larger registered social landlords establishing internal audit. This originated from a previous paragraph which previously referred to the regulatory requirement for "adequate and effective" internal audit. Unfortunately, this phrase is no longer appropriate as it tends to pre-judge the quality of the internal audit service which may be established. As a result, this phrase should be deleted.