Europe: Response To Green Paper “Audit Policy: Lessons From The Crisis”

The Financial Reporting Council has published its response to the European Commission's audit policy consultation.

With respect to the key proposals within the Green Paper, the FRC supports:

• Efforts to minimise the systemic risk associated with the level of audit market concentration provided that those efforts are not at the expense of audit quality.

• Improved transparency of the audit process. The primary vehicle for greater transparency should be the audit committee report with a requirement for the auditors to report positively on its completeness and fairness.

• The adoption of ISAs in Europe. They suggested that the proposed European Audit

Authority should be responsible for the endorsement process.

• The tightening of auditor independence rules. The UK has recently consulted on this issue and found support from market participants for clearer and more transparent rules, although not for a complete ban on the provision of non‐audit services by auditors to their clients. The revised UK Ethical Standards may be a good starting point for discussion on this topic.

• The establishment of a European Audit Authority to ensure that audit receives appropriate focus within the European regulatory architecture.

• In principle, measures to increase the flexibility for firms to operate within different member states. However any move to “maximum harmonisation” should not be at the expense of existing standards.

FRC do not support:

• A wholesale ban on the provision of non‐audit services to audit clients. The UK’s recent consultation on this issue indicated that investors and other market participants are not in favour of such a ban. We would also be concerned that a ban which included audit‐related services could stifle the development of more innovative audit products.

• The forcible creation of audit‐only firms. Such firms would be unable to offer their staff a wide range of work experiences and compensation packages are likely to be lower than firms can offer currently, making it more difficult to recruit and retain high quality personnel and hence impacting negatively on audit quality.

• The mandatory use of joint audits. There is a risk that some matters fail to be addressed effectively as they are seen to fall between the two firms. Client management may also engage in arbitrage between the two firms, particularly when it comes to difficult or contentious judgements.

Complete Report.

UK: Audit Committee Guidance

The Financial Reporting Council has published updated guidance for audit committees with regard to issues arising from current economic conditions. The purpose of the guidance is set out in the introduction: "to influence the thinking and focus of audit committee work during the forthcoming annual reporting season by posing some key questions prompted by recent FRC analysis of the current reporting environment”.

Recent studies by the FRC have identified room for improvement in the relevance and focus

of corporate disclosures about principal risks and uncertainties. It has been observed that

some companies present a list of all possible risks rather than those that might be regarded as “principal risks” and that some risk disclosures lack company specific detail to enable a

reader to properly understand the true nature of the exposure. Work by the FRC has also identified that it is not always clear from the risks and uncertainties reported whether they have been fully evaluated and taken into account in preparing budgets and forecasts that support going concern and impairment assessments.

Complete report.

Europe : Green Paper on Audit Policy - Lessons From the Crisis

The European Commission has published a green paper titled Audit Policy - Lessons from the Crisis.

The green paper is wide-ranging in scope and seeks views on, amongst other things, the role of the auditor and the audit.The measures adopted both in Europe and elsewhere in the direct aftermath of the financial crisis have focussed on the urgent need to stabilise the financial system. While the role played by banks, hedge funds, rating agencies, supervisors or central banks has been questioned and analysed in depth in many instances, limited attention has been given so far to  how the audit function could be enhanced in order to contribute to increased financial stability. The fact that numerous banks revealed huge losses from 2007 to 2009 on the positions they had held both on and off balance sheet raises not only the question of how auditors could give clean audit reports to their clients for those periods but also about the suitability and adequacy of the current legislative framework. It seems thus appropriate that both the role of the audit as well as the scope of audit are further discussed and scrutinised in the general context of financial market regulatory reform.

For complete paper see here (pdf)