1. Standing for trust and integrity Alliott Group Amsterdam 7 May 2010 EU Adoption of ISAs and Other Related Matters Philip Johnson FEE Deputy President

2. Standing for trust and integrity 2 Agenda  A little about FEE  The Accountancy Profession at a Crossroads”  Current position within the European Commission  ISA Implementation challenges  Assurance services other than Audit  Impact of the Financial Crisis on Financial Reporting  eXtensible Business Reporting Language (XBRL)  Ethics and Independence  Audit Regulation in Europe  Assurance on Corporate Governance Statements  Thoughts on the implications for our profession

3. Standing for trust and integrity 3 Federating Member Bodies  43 professional institutes of accountants  32 European countries, including all 27 EU  > 500.000 professional accountants

4. Standing for trust and integrity 4 FEE’s Role: Representing the Profession and Adding Value to Members Catalyst in Europe

5. Standing for trust and integrity 5 Areas of activity Company Law Corporate Governance Ethics Auditing Accounting Insurance Banks Financial Reporting Sustainability Qualification and Market Access SMEs-SMPs Public Sector Taxation

6. Standing for trust and integrity 6 “The Accountancy Profession at a Crossroads”

7. Standing for trust and integrity 7 The accountancy profession at a crossroads Developments in Corporate Governance Public Oversight of the Profession Helping clients in areas like Sustainability Extended use of XBRL Changes in Ethics and Independence Developments regarding services other than audit Changes in financial reporting Adoption/ Implementation of clarified ISAs Increasing cross border activities

8. Standing for trust and integrity 8 Recent messages from the European Commission re Auditing, Financial Reporting etc.

9. Standing for trust and integrity 9 Recent Messages from the European Commission  Want to reduce burden on SMEs  Real difficulty is “how”  Recognition that SMEs are fundamentally important to the economy so need to grow and develop the sector (97% of companies in Europe)  Need to reflect on what changes, if any, are needed

10. Standing for trust and integrity 10 Recent Messages from the European Commission  Financial Reporting  Micro entities Member State option Not about eliminating the accounting rules Parliament voted for revised proposals – would like to progress during Spanish Presidency  Other SMEs Revision of 4 th and 7 th Directive IFRS for SMEs “Evolution” not “Revolution”

11. Standing for trust and integrity 11 Recent Messages from the European Commission  Financial Reporting (cont)  Listed SMEs Should EC provide different rules? Should they have full IFRS or something else? What can be done in areas such as Prospectuses and other reports to shareholders?

12. Standing for trust and integrity 12 Recent Messages from the European Commission  Auditing  Green paper – to be issued before end of September 2010 Structure of the market (concentration and choice) ISA adoption Role and governance of the auditors Audit for SMEs (do we need to simplify audit for SMEs and SMPs?) International co-operation Supervision and inspection of audit firms across Europe Ethical matters like conflicts of interest etc., etc.

13. Standing for trust and integrity 13 Implementation of ISAs Challenges for the Firms/Profession and Applicability of ISAs to Audits of SMEs

14. Standing for trust and integrity 14 Main Challenge Due to current thinking within the European Commission, main challenge will be Association/Network firms working with different auditing standards unless direction from the centre or mutual co-operation amongst the constituent firms within an Association/Network

15. Standing for trust and integrity 15 Countries which have decided to implement Clarified ISAs (April 2010) CountriesStatus#% Belgium (2012/2014), Bulgaria, Cyprus, Czech Republic, Finland, Hungary, Ireland, Latvia, Malta, Netherlands, Norway, Slovak Republic, Slovenia, Sweden, UK Yes1552 Austria, France, Luxembourg, Poland, Portugal, Romania, Switzerland No, awaiting EC 724 Denmark, Estonia, Germany, Greece, Italy, Lithuania, Spain Unclear724 Total29100

16. Standing for trust and integrity 16 ISA Implementation Challenges for the Firms/Profession  Need for considerable human and financial investment in first years:  Translation of ISAs into local language  New or updated audit approach policy manuals and methodology  New or updated audit software  New or updated training material and training efforts  Coordination with and buy-in from stakeholders (preparers, regulators, inspection bodies, software providers, training consortia, professional media, etc.)  Involvement of professional bodies (essential)

17. Standing for trust and integrity 17 Big Audit Firms  Have implemented clarified ISAs by IAASB effective date (2010 year-ends)  Were already largely ISA compliant  Can look after themselves for implementation  Issues:  Globally consistent approach  Local pluses and potential minuses (local laws and regulations)  Different approach for different industries and size of entities

18. Standing for trust and integrity 18 Smaller Audit Firms  Smaller firms need more help as it is a greater challenge for them  Not all countries are starting from the same position re standards currently being used. Much to do in many countries  Issues:  Considerable time required to implement (start now)  Need help from professional accountancy bodies (FEE Member Bodies)  FEE Member Bodies seek help from IAASB, FEE, etc.  IAASB to produce implementation or support material (video modules and slides for certain ISAs) – will it focus on SMEs

19. Standing for trust and integrity 19 FEE ISA Implementation Task Force  Set up to consider work required on implementation of clarified ISAs in 2010 and beyond  Includes representatives of IFAC SMP Committee, EGIAN, World Bank, etc.  Established current ISA implementation status and approaches across Europe (survey)  Based on the results of the survey, still to determine what further work to be undertaken  on implementation framework  on communications  Focusing on sharing information to help FEE Member Bodies and SMPs wherever possible  Considering involvement with audit software providers

20. Standing for trust and integrity 20 Applicability of ISAs for Audits of SMEs (1) Concerns of SMPs  Cost of audit will increase using clarified ISAs  Concerns about scope to apply professional judgement to determine audit approach in line with nature, size, risk and complexity of audited entity  Concerns about excessive audit documentation requirements  Expectations of public oversight bodies (POBs) upon quality assurance reviews or inspections are unclear

21. Standing for trust and integrity 21 Applicability of ISAs for Audits of SMEs (2) Response:  Need to re-engineer the audit to benefit from work on internal control environment  Open debate of FEE with IAASB, POBs, EGAOB and European Commission on concerns and possible resolution  FEE Policy Statement on ISAs produced  IAASB Staff Q&A on proportionality of ISAs in SME context issued  IAASB implementation modules rolled out  Update of APB Practice Note 26 on Guidance on Smaller Entity Audit Documentation completed  IFAC SMP Committee Guide on Using ISAs in the audit of SMEs being reviewed – due end of 2010

22. Standing for trust and integrity 22  36 Clarified ISAs and ISQC 1  16 revised and redrafted ISAs; 1 new ISA  Remaining ISAs and ISQC 1 redrafted  Revisions include new requirements and guidance that aim to improve practice in a variety of respects  Redrafts include requirements drawn from existing ‘grey text’  Effective date: 2010 year end audits  Moratorium: no new ISAs effective before 2011 Output of the Clarity Project

23. Standing for trust and integrity 23 ISAs General Principles and Responsibilities Risk Assessment and Response to Assessed Risks Audit Evidence Using Work of Others Audit Conclusions and Reporting Specialized Areas ISA 200 ISA 210 ISA 220 ISA 230 ISA 240 ISA 250 ISA 260 ISA 265 ISA 300 ISA 315 ISA 320 ISA 330 ISA 402 ISA 450 ISA 500 ISA 501 ISA 505 ISA 510 ISA 520 ISA 530 ISA 540 ISA 550 ISA 560 ISA 570 ISA 580 ISA 600 ISA 610 ISA 620 ISA 700 ISA 705 ISA 706 ISA 710 ISA 720 ISA 800 ISA 805 ISA 810 16 Revised and Redrafted 19 Redrafted only 1 New 36 Clarified ISAs

24. Standing for trust and integrity 24 Objectives and overarching responsibilities Risk assessment and evidence gathering in riskier areas Quality of audit evidence, and basis for reliance on others Auditor communications ISA 200 – Overall Objectives and Conduct of ISA Audit ISA 320 - Materiality ISA 450 – Evaluation of Misstatements ISA 402 – Service Organizations ISA 505 – External Confirmations ISA 540 – Estimates and Fair Values ISA 550 – Related Parties ISA 580 – Written Representations ISA 600 – Group Audits ISA 620 – Using Work of Experts ISA 260 – Communication with TCWG ISA 265 – Communicating Deficiencies in I/C ISA 705 - Modifications ISA 706 – EOM/Other Matter Paragraphs Redrafted and Revised ISAs

25. Standing for trust and integrity 25 Main changes in Clarified ISAs  The split between objectives, requirements and guidance (AM) makes the ISA much clearer  Much more risk-based, so much more focus when performing an audit on understanding the entity, risk assessment and internal controls than would be the case if substantive audit procedures used in all areas  Heightened attention to fraud  Use of professional judgement in audit, reporting and documentation continues to be important  Focus on significant matters, risks, judgements and documentation cannot be stressed enough

26. Standing for trust and integrity 26 There is an opportunity to promote the benefits of the clarified ISAs Put related party transactions nearer the heart of the audit More principles based approach through use of objectives More rigorous approach to the audit of groups More robust approach to management override Relevant to responding to the financial crisis including ISA 450 on evaluation of misstatements Greater clarity as to what is expected of auditors

27. Standing for trust and integrity 27 Some key messages that have emerged from UK implementation Strong resistance to dual track approach for big and small audits Recognition that clarified ISAs are easy to understand Involvement of engagement partner is key to audit effectiveness and efficiency Too early to gauge success of current implementation Enthusiasm needs to be encouraged Learning providers want to know why the changes were made and not just what the changes are Effective implementation needs sufficient time and effort The DVDs issued by the IAASB are useful Need to sell the success of clarified ISAs

28. Standing for trust and integrity 28 Issues that became apparent after 2005 Implementation of Risk ISAs in UK Smaller firms need special support Many firms were struggling with the risk ISAs Quality of software is key Partner engagement is critical Successful implementation takes several years Support software with learning is important

29. Standing for trust and integrity 29 Impact of Use of Audit Exemption Thresholds

30. Standing for trust and integrity 30 Use of Audit Exemptions for Limited Liability Companies in the EU, Norway and Switzerland Countries% Maximum or near maximum thresholds: Balance sheet total: €4.400.000 Net turnover: €8.800.000 (Austria, Belgium, Germany, Ireland, Italy, Luxembourg, the Netherlands, Romania, Slovenia, Switzerland 1, United Kingdom) 1138 Balance sheet total: between € 2.500.000 and 3.000.000 Net turnover: between € 5.000.000 and 5.700.000 (Greece, Poland and Spain) 310 Balance sheet total: between € 1.000.000 and 1.800.000 Net turnover: between € 2.000.000 and 3.100.000 (Czech Republic, France (except SA), Lithuania and Portugal) 3 (1)10 1 Introduction or increase in 2007, 2008 or 2009

31. Standing for trust and integrity 31 Use of Audit Exemptions for Limited Liability Companies in the EU, Norway and Switzerland Countries% Balance sheet total: between € 500.000 and 900.000 Net turnover: between € 1.000.000 and 1.800.000 (Estonia 1,4 and Slovak Republic 1 ) 28 Balance sheet total: between € 100.000 and 500.000 Net turnover: between 200.000 and 1.000.000 (Bulgaria, Denmark 1,4, Finland 2, Hungary 1 and Latvia 1 ) 517 Balance sheet total/ net turnover: €0 (Cyprus 3, France (SA), Norway, Malta 3, Sweden 4 ) 517 29100 1 Introduction or increase in 2007, 2008 or 2009 2 Decrease in 2007 3 For tax purpose 4 Increase in 2010 (final or expected)

32. Standing for trust and integrity 32 Impact of use of Audit Exemption Thresholds  Trend to increase audit exemption thresholds in EU  97% of all EU audits are SME audits  The market for statutory audit is shrinking (95% are below EU audit threshold)  Substitution by voluntary audits is not evident  However, the economy continues to need comfort that the financial performance of companies is fairly presented

33. Standing for trust and integrity 33 Reaction to more companies not requiring an audit

34. Standing for trust and integrity 34 Assurance services other than audit Issues:  “An audit is an audit” must be preserved (brand protection)  Increase in audit exemption thresholds  More regulatory pressure  Clarified ISA audit more demanding and more costly  Desire by profession to provide something to fill the hole  ……… Responses:  Development of / changes to assurance services other than audit  Addressed on national, FEE & IAASB level  Divergent views in different countries  Desire to arrive at positive audit opinion with less work – not possible without confusion or brand damage  FEE survey July 2009

35. Standing for trust and integrity 35 Assurance initiatives other than audit in some countries  Consideration of or proposals for non audit assurance service for (certain) smaller entities in Denmark, Finland and Malta  Mandatory statutory review for ‘‘SMEs’’ in Estonia and Switzerland  Presentation or compilation engagements with certain assurance in France and Germany  Accountant (not auditor) report for small charities & pension schemes in Ireland  Continous integrated reasonable assurance by Collegio Sindacale in Italy  Limited assurance based on review plus substantive procedures in UK (ICAEW)

36. Standing for trust and integrity 36 Assurance services other than audit: conclusions  Fragmentation a major issue in Europe and beyond if no global standard  Call by FEE for Member States and National Institutes to exercise constraint  IAASB encouraged to speed up work on review engagements- exposure draft late 2010

37. Standing for trust and integrity 37 Impact of the Financial Crisis on Financial Reporting

38. Standing for trust and integrity 38 Impact of the financial crisis on reporting  Was IFRS to blame or did it identify the problem?  Political pressure to achieve a ‘‘Level Playing Field’’  Revision of Standards accelerated (IAS 39 -> IFRS 9)  Convergence to one single set of global standards called for but slow progress  Regulatory vs financial reporting (dynamic provisioning)  Role of Europe and EC

39. Standing for trust and integrity 39 Changes initiated by EC Fourth and Seventh Directives  Member State option to exempt micro-entities  Complete Overhaul of the Fourth and Seventh Directives?  IFRS for SMEs:  Debate goes on – EC not clear in its view  Large differences between Member States on intended use  European Parliament – in the past against it but what now? A wait and see policy !

40. Standing for trust and integrity 40 eXtensible Business Reporting Language (XBRL)

41. Standing for trust and integrity 41 eXtensible Business Reporting Language (XBRL)  Allowing or mandating filing of audited FS and / or tax filings under XBRL becomes more and more common  IAASB project proposal to develop  Pronouncement on expected auditor work efforts and implications on his reporting if XBRL data filing with FS or if only XBRL data filed  FEE XBRL Task Force has prepared a FEE Policy Statement to educate the accountancy profession and third parties on the use of XBRL  Explosion in available literature shows increased activity around world  Profession needs to engage now – increased demand for SMP services

42. Standing for trust and integrity 42 Ethics & Independence

43. Standing for trust and integrity 43 Ethics & Independence  Principles: covered in Articles 21 & 22 of SAD  EC recommendation on independence (2002) still applicable  Revised IESBA Code of Ethics (July 2009), effective 1 January 2011, significantly strengthens the independence requirements for PIE audits, non-PIE audits and other assurance services  Changes re key audit partner, partner rotation, internal audit services, tax services, relative size of fees, contingent fees  EU MS currently have wide variety of independence principles and/or requirements based on (old) IFAC code – need for EC Recommendation

44. Standing for trust and integrity 44 Audit Regulation in Europe

45. Standing for trust and integrity 45 Audit Regulation in Europe  Basis for European regulation on auditing: Statutory Audit Directive (SAD) (May 2006)  For implementation in EU Member States (MS) by July 2008  As at 1 February 2010; 2 EU MS had not yet implemented the SAD: Ireland and Spain  They hope to implement in 2010; the European Commission (EC) has taken them to the European Court of Justice  Norway will implement as well  The EC has not yet checked the content of the national transposition of SAD  Significant number of countries are still executing the changes of the SAD in their MS

46. Standing for trust and integrity 46 EC Recommendation on Quality Assurance  Guidance for implementing independent external quality assurance systems for statutory auditors and audit firms conducting an audit of Public Interest Entities (PIEs)  No detailed guidance for external quality assurance systems for statutory auditors and audit firms auditing entities other than PIEs  Issued 6 May 2008  EU MS inform EC about actions taken  Need for mutual recognition of POBs going forward

47. Standing for trust and integrity 47 EC Recommendation on limitation of liability  Guidance for limitation of civil liability of statutory auditors and audit firms auditing public interest entities  No limitation for intentional breach of duties  Limitation against company and third parties  Issued 6 June 2008  Important for cross border activities  MS inform EC about actions taken by 5 June 2010  No political appetite to move this forward at present time

48. Standing for trust and integrity 48 EC Decision on Exchange of Working Papers  EC adequacy decision re Article 47 SAD for Canada, Japan and Switzerland, (Australia in pipeline)  Based on cooperation and exchange principle  US PCAOB not included  Current EC prohibition on US PCAOB access to EU audit firm or EU MS documents  Bill pending in US Congress to change Sarbanes-Oxley Act to make exchange of documents possible  Mutual reliance between EU POBs & US PCAOB is off agenda at moment  Existence of PCAOB currently being challenged !!

49. Standing for trust and integrity 49 Assurance on Corporate Governance Statements for Listed Entities

50. Standing for trust and integrity 50 The Auditor and Corporate Governance in European Legislation  The 4 th and 7 th EU Accounting Directives (2006/46/EC) were amended in June 2006  Article 46a now requires disclosure of information about listed company practices in a “corporate governance statement” (CGS) in the annual report or outside the annual report  Role for the statutory auditor depending on whether the CGS is or is not included in the annual report Minimum requirement: production check versus consistency check  Measures to be transposed into national legislation by 5 September 2008; a few EU Member States are late !!

51. Standing for trust and integrity 51 Elements CGS  4 th & 7 th EU Accounting Directives: disclosure of 6 elements in CGS for listed entities:  Reference to corporate governance code (CGC) and practices applied  CGC: comply or explain approach  Description of main features of internal control and risk management system for financial reporting process  Take-over bid information (2004/25/EC)  Operation shareholder meeting, key powers and description shareholders rights  Composition and operation of administrative management and supervisory bodies and their committees

52. Standing for trust and integrity 52 FEE Discussion Paper on Assurance on CGS  Main features:  Outlines key elements of CG codes and legal requirements in Europe;  Summarises main features of existing CG reporting and 2006 EU changes on CGS;  Explains potential auditor involvement with elements CGS as well as required involvement based on IAASB material;  FEE’s views on potential maximum involvement of the auditor with elements of CGS; and  Practical examples of auditors’ assurance reports on their involvement

53. Standing for trust and integrity 53 Examples of Potential Maximum Level of Auditors’ Involvement CGS exampleAuditors’ involvement The Board is effectiveNone Division of responsibilities between Chairman and CEO Factual finding based on agreed upon procedures The Board maintains a sound system of internal control and risk management Limited assurance Disclosure of remuneration of individual directors Reasonable assurance

54. Standing for trust and integrity 54 “The Accountancy Profession at a Crossroads”

55. Standing for trust and integrity 55 Some messages from the FEE SMP/SME Conference in Venice  There will be more regulation but there is a desire to get it right first time  Profession is changing and our services to SMEs will change  Clients want to pay for expertise and experience  Audit is a diminishing market but other services will stand in its place

56. Standing for trust and integrity 56 Messages from clients (raised at the Venice conference)  Improve your knowledge of the business  More focus on the business and less on figures  SMEs want support from SMPs to help them develop their businesses  Wide range of services to be provided not just audit (but will regulators allow it?)  Prepared to pay more for added value services but not necessarily for audit

57. Standing for trust and integrity 57 The accountancy profession at a crossroads Developments in Corporate Governance Public Oversight of the Profession Helping clients in areas like Sustainability Extended use of XBRL Changes in Ethics and Independence Developments regarding services other than audit Changes in financial reporting Adoption/ Implementation of clarified ISAs Increasing cross border activities

58. Standing for trust and integrity 58 Thoughts on the implications of changes for the Auditing Profession Questions that need to be answered if we are to prosper in the future

59. Standing for trust and integrity 59 Implications for the Profession  Will there be convergence of Standards globally – Auditing, Ethical, Financial Reporting? If not, what will be the implications?  How will the Regulators finally react to the Financial Crisis? More regulation or better regulation?  What will the emerging markets of China, India, Russia and Brazil adopt as their Standards and how will this impact on us? Some already moving to IFRS and ISAs  What will be the impact of XBRL be on financial reporting and auditing?  Are we well placed to lead on Sustainability?

60. Standing for trust and integrity 60 Implications for the Profession  In Europe :  Will the profession across parts of Europe lose credibility if ISAs are not adopted by the EC  Will we have a two track profession – auditors and non-auditors and/or large firms and small firms working with different auditing standards ?  How will we train our people (and, as a consequence, those who go into industry and commerce)?  How can we attract and retain the best people?  If, globally, we don’t have an audit for the vast majority of companies what will the market want in its place (if anything) and are we equipped to provide it?

61. Standing for trust and integrity 61 There is a big opportunity (if we seize it) as well as a big challenge

62. Standing for trust and integrity 62 Discussion and Questions

63. Standing for trust and integrity 63 Standing for trust and integrity Visit us @ www.fee.be