Further supplementary memorandum by Mr
Veron Soare, Executive Director, Professional Standards, ICAEW
I would like to comment on a number of the points
that were made during the Committee hearing on Tuesday 9 November
at which representatives of the supervisory community, including
the Financial Reporting Council (FRC), gave evidence. As a Recognised
Supervisory Body (RSB) for statutory audit under the Companies
Act 2006, the ICAEW has a useful perspective to offer on the matters
As the Committee may be aware the current arrangements
for audit supervision in the UK arose out of a 2002-03 Government
Review commissioned by the then Secretary of State for Trade and
Industry (Review of the Regulatory Regime of the Accountancy
Profession). This Review concluded that the arrangements established
under the Companies Act 1989 were fundamentally sound but that
the system could be strengthened.
This led to the introduction of a revised supervisory
framework (now part of the Companies Act 2006) whereby Recognised
Supervisory Bodies (RSBs) such as ICAEW are subject to the oversight
of the Professional Oversight Board (POB) and are also required
to participate in independent arrangements for the monitoring
of public interest audits and the investigation, for disciplinary
purposes, of public interest cases. The latter arrangements are
operated with ICAEW's agreement via the Accountancy and Actuarial
Discipline Board (AADB), the former via the Audit Inspection Unit
(AIU), who along with POB are part of the FRC.
It should be noted that auditing standards,
effectively the "rules" on how to conduct an audit,
sit under the control of the Auditing Practices Board, also part
of the FRC.
These arrangements are now mirrored to a very
large extent in the EU's Statutory Audit Directive. While in many
respects the UK has led the way in the development of robust arrangements
for the supervision of auditors, for good reason the EU Directive
draws a clear distinction between those responsible for the day-to-day
regulation of audit firms and those who provide oversight of this
process. In our view placing regulatory functions within the remit
of the FRC blurs the separation between regulation and oversight.
It is with this in mind that we write to the Committee.
9 NOVEMBER EVIDENCE
In their evidence session on 9 November the
FRC noted that, as they do not register/licence the audit firms
which the AIU inspects, they only have the "nuclear"
option of recommending to a RSB the removal of a firm's registration/licence.
This is because under the terms of the Companies Act the AIU provides
independent inspection which the RSBs then act upon. Under the
Act, RSBs have a wide range of powers to take action against firms
including removal of registration. All RSBs can fine a firm, place
restrictions on the type of audit clients it can have, place conditions
on how audit work is conducted and remove the right of individuals
within the firm from being involved in audit.
With respect to reports made by the AIU to the
Audit Registration Committee (ARC) of the ICAEW, these are closely
reviewed and appropriate sanctions applied in accordance with
the circumstances of each case. The AIU has never recommended
that a firm's registration be removed, or that an individual be
prevented from undertaking audit work although it has made other
recommendations for regulatory action. In all cases these have
been taken up by the ARC and action taken against the firm or
individual in question. In some cases the ARC has taken additional
action to that requested by the AIU, such as restricting a firm
from taking on new audit appointments, until the underlying matters
have been dealt withthis may also require the firm to submit
to an additional AIU inspection.
In passing it is worth noting that despite the
most recent round of AIU reports on large firm audits raising
issues requiring "significant improvement" and an increase
in auditor scepticism, no request was made by the AIU to the ICAEW's
ARC to take any regulatory action against either a large firm
or any individual auditor.
As we have stressed to the Committee in our
previous submissions, it is important that recommendations on
the future of audit regulation are evidence based. The AIU and
POB are made aware of the ARC's decisions that are based on AIU
reports and they have never commented adversely on the decisions
or the process used to reach them.
As far as the ICAEW is concerned, nothing presented
by the FRC to date suggests that the Companies Act 2006 provisions
are not working effectively. However, we recognise that the continuing
success of the regime depends on clear lines of reporting between
the AIU and the ARC.
With reference to the AADB, it is able to use
any disciplinary sanction open to the ICAEW, including the power
to impose unlimited fines and exclude from membership. This arrangement
continues the powers enjoyed by the AADB's predecessor body, the
Joint Disciplinary Scheme (JDS). Like the JDS, the AADB independently
investigates public interest cases against audit firms registered
with the ICAEW and is designed to play a key role in maintaining
confidence in the UK audit profession. However, despite accumulating
a substantial caseload the AADB shows no evidence of an ability
to meet the promises concerning speed and thoroughness of investigation
made at its outset. Indeed, according to its website, since announcing
its first investigation in 2005, the AADB has brought only two
cases to a tribunal hearing. An independent review of the effectiveness
of its work may now be timely.
During their evidence session the FRC also commented
that it needed a wider range of sanctions against RSBs. Again
we would advocate an evidence based approach here. The POB undertakes
annual reviews of each RSB. Inevitably matters are discussed and
recommendations made. As far as we are aware, all matters raised
have been resolved to the satisfaction of the POB as evidenced
by successive annual reports by the POB to the Secretary of State.
As the Committee is aware the European Commission
is currently consulting on a number of these issues at a pan-European
level including the possibility of an EU-wide audit licence, which
would have a major impact on current licensing arrangements for
audit firms carrying out audits of public interest entities. This
has been a global crisis and reform proposals must be capable
of implementation across international markets.
I would be happy to brief you further on any
or all of these matters.
23 November 2010