Incorporation of the 8 th Directive into UK law Regulation of Companies and their Auditors

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

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

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

The Financial Reporting Council FRC AIU AUDIT INSPECTION UNIT AIDB ACCOUNTANCY INVESTIGATION & DISCIPLINE BOARD APB AUDITING PRACTICES BOARD APB AUDITING PRACTICES 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 FRRP FINANCIAL REPORTING REVIEW PANEL POBA PROFESSIONAL OVERSIGHT BOARD FOR ACCOUNTANCY ASB ACCOUNTING STANDARDS BOARD Corporate Governance

The FRC’s 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

‘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

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

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

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

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

POBA – the main oversight entity  Key attributes –gain the profession’s 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

Monitoring the quality of Audits through the AAIU  AIU’s 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

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

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

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

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

Oversight for the next decade  FRC’s 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

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 it’s there to assist.

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

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