Advanced Program in Auditing and Accounting Regulation Module 12 Enhancing Statutory Audit Quality from a Financial Regulator’s Perspective Presenter: Geraldine McWeeney Auditing and Accounting Policy Irish Financial Services Regulatory Authority 22 November 2005

Contents 1.Respective Responsibilities of Board of Directors/Those Charged with Governance Financial Regulators External Auditors Areas of Common Interest for the Financial Regulator and the External Auditors Limitations on Contribution Auditors can make to the Supervisory Process 2.Directors’ Compliance Statements and Auditors’ Reports thereon. 3.Irish Financial Regulator’s liaison with External Auditors 4.The establishment of the Irish Auditing and Accounting Supervisory Authority (IAASA)

1. Respective Responsibilities of: 1.1 Board of Directors/Those Charged with Governance Promote the success of the entity for the benefit of the shareholders as a whole –Provide entrepreneurial leadership within a framework of prudent and effective controls which enables risk to be assessed and managed –Establish appropriate management information systems –Ensure the regulated entity has appropriate risk management policies and procedures –Have regard for the interests of all stakeholders –Compliance with laws and regulations –Set the Entity’s values and standards –Primary source of information to the Regulator

1. Respective Responsibilities of: 1.2 Financial Regulator Prudential Supervision and Financial Stability To foster sound and solvent financial institutions which give consumers confidence that their deposits and investments are secure Consumer Protection Help consumers to make informed decisions on their financial affairs in a safe and fair market

1. Respective Responsibilities of: 1.3 External Auditors To give an independent opinion of the Financial Statements on whether they present a ‘true and fair view’ on the state of affairs of the entity. Statutory Duty to report to the Financial Regulator and Other Bodies in certain specified circumstances.

1.4Areas of common interest for the Financial Regulator and External Auditors Going Concern Sound System of internal control Proper accounting system Good Corporate Governance

1.5Limitations on Contribution Auditors can make to the Supervisory Process Auditor’s reports are a supplement to, and not a substitute for, proper reporting by regulated entities. A financial statement audit provides a type of assurance that has limited value to the regulatory process. –Financial Statements are historical documents. –A financial statement audit cannot be assumed to include consideration of all matters that may be relevant to a regulators functions. –Materiality thresholds may be very high –The Financial Regulator and the External Auditor must recognise their duty to observe confidentiality with reciprocity of information

2. Directors’ Compliance Statements and External Auditors’ reports thereon 2.1 Review Group on Auditing (RGA) Recommendation –“Directors of a company should be required to report on an annual basis to the shareholders on the company’s compliance with its obligation under company law, taxation law and other relevant statutory or regulatory requirements”. –“Auditors opinion required on whether the Directors’ Compliance Statement is reasonable” Implies 100% compliance with all legislation Envisaged that it would apply to all companies other than those with very low turnover who are exempt from audit. Envisaged that it would also apply to all financial institutions

2. Directors’ Compliance Statements and External Auditors’ reports thereon 2.2Companies legislation –Section 45 of the Companies (Auditing and Accounting) Act, 2003 – not yet commenced “Policies and Procedures” approach rather than 100% compliance Mandatory for publicaly listed companies (plc’s) and llarge private companies Other “relevant obligations” confined to ( a) those enactments that provide a legal framework AND (b) that may materially affect the entity’s financial statements A review of Section 45 was conducted by the Company Law Review Group (CLRG) as a result of lobbying from affected parties. The CLRG is expected to recommend substantial amendments to Section 45.

2. Directors’ Compliance Statements and External Auditors’ reports thereon 2.3 Financial Services Legislation Section 25 of the Central Bank Act, 1997 as substituted by section 26 of the Central Bank and Financial Services Authority of Ireland (CBFSAI) Act, 2004 –Closer to the wording of the Review Group on Auditing (RGA) ‘Policies and Procedures’ approach is not mentioned No materiality level –It is an enabling provision (not mandatory) –The Financial Regulator to issue Guidelines –The Financial Regulator would first consult widely with Interested Parties.

3. Irish Financial Regulator’s liaison with External Auditors 3.1 Receipt of annual audited financial statements from the regulated entity (no separate auditor’s report on financial statements is prepared by the auditor for the Financial Regulator). 3.2Statutory Duty of Auditors to Report to the Financial Regulator Examples of circumstances where auditors must report to the Financial Regulator are contained in Section 33 of Investment Intermediaries Act, 1995.

3. Irish Financial Regulator’s liaison with External Auditors 3.2.2Other examples where there is a Statutory Duty on Auditors to Report to the Financial Regulator are contained in Section 27 of the Central Bank Act, 1997 as substituted by section 26 of the Central Bank and Financial Services Authority of Ireland (CBFSAI) Act, 2004 Section 27B – Auditor of regulated financial service provider to lodge annual report with the Financial Regulator Section 27C - Duty of auditor to provide the Financial Regulator with copies of Reports sent to those charged with governance Section 27D - Duty of auditor to provide the Financial Regulator with copies of Reports sent to the Director of Corporate Enforcement

3. Irish Financial Regulator’s liaison with External Auditors 3.3The Financial Regulator may hold bi-lateral meetings (Financial Regulator and auditor) and tri-lateral meetings (Financial Regulator, auditor and regulated entity) to reciprocate information. The Financial Regulator and the auditor must recognise their duty to observe confidentiality. 3.4Co-operation and assistance to Auditors in development of Guidance for Auditors of Regulated Entities Examples Reports on Client Assets Statutory Duty to Report Practice Note 19(I) (Banks) Practice Note 20(I)(Insurers) Requirements on Auditors of Credit Unions

3. Irish Financial Regulator’s liaison with External Auditors 3.5 A Liaison Group exists between the Financial Regulator and Accountancy Bodies.

3. Irish Financial Regulator’s liaison with External Auditors 3.6 Other enabling provisions regarding auditors in legislation 3.6.1Reports on request of the Financial Regulator Reports on other matters (Section 27E of Central Bank Act 1997) Access to audit working papers (Section 27F of Central Bank Act 1997) Reports on Directors’ Compliance Statements (Section 26 of Central Bank Act 1997)

3. Irish Financial Regulator’s liaison with External Auditors “Assurance Levels” Opinion Negative Assurance Specified Procedures Compilation Reports 3.6.3“Expectation Gap”

4.Establishment of the Irish Auditing and Accounting Supervisory Authority (IAASA) Review Group on Auditing (RGA) Recommendation (July 2000) Legislated for in the Companies (Auditing and Accounting) Act, 2003 Ministerial Order required to ‘commence’ the legislation Financial Regulator has a nominee on the Interim Board of the Irish Auditing and Accounting Supervisory Authority (IAASA) 3 out of 15 Board members are nominated by Accountancy Bodies. Maximum of 5 accountants out of 15 on the Board

Establishment of the Irish Auditing and Accounting Supervisory Authority Funding –60% Accountancy Bodies –40% State Objective –To supervise how the prescribed accountancy bodies regulate and monitor their members –To promote adherence to high professional standards in the auditing and accountancy profession –To monitor whether the accounts of certain classes of companies and other undertakings comply with the Companies Acts, and –To act as a specialist source of advice to the Minister on auditing and accounting matters

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