Comments from ACCA
ACCA is pleased to respond to the Financial Reporting Council (FRC) Consultation on Revisions to FRC Guidance on Audit Committees: Non-Audit Services.
We welcome this consultation on this important issue. It is essential to sound corporate governance for investors to be able to have confidence in the effectiveness of an external audit. Such confidence depends on many factors and one of these is investors having trust that external audit is conducted in a way which both is, and appears to be, completely objective. Any threats to objectivity or independence are therefore a matter of concern.
We agree that balanced and informative disclosure to investors by the audit committee about how it satisfies itself that the audit is objective is fundamental to enhancing investors' confidence in the audit process. In this light we note the disclosure in the document that respondents to a previous consultation considered that improvement could be made in disclosure such as an 'explanation of why individual non-audit service engagements have been provided by a company's auditor rather than by another party and how the auditor's independence has been safeguarded'. We endorse this suggestion.
On the proposed new text, we consider that there is helpful and welcome guidance on two key matters, namely the specific focus on internal audit services and disclosure of the audit committee's policy and considerations on the provision of non-audit services.
One could conclude that, for listed companies, the requirements of the APB's proposed revised Ethical Standards for Auditors would mean that internal audit services would only be provided by an external auditor in exceptional circumstances. This is because the ethical principles place a clear responsibility on audit committees to consider the justification and disclose their reasons for the decision in accordance with clearly identified policies.
Our comments below on the proposed changes to the guidance reflect a detailed policy on non-audit services approved earlier this year by ACCA's governing Council.
(i) Comment on revised paragraph 4.8 on internal audit
We welcome the attention given here to the particular implications of the auditor's involvement in internal audit work. We would however suggest some amendments to the wording as follows (our italics):
4.8 If the external auditor is being considered to undertake aspects of the internal audit function, the audit committee should consider the effect his appointment would have for the effectiveness of the company's overall arrangements for internal control and for investor perceptions in this regard. Provision of internal audit by external auditors is a particularly sensitive issue, and so it is important that investors understand and accept the rationale.
Investor perceptions are likely to be influenced by the explanations set out in the annual report under paragraphs 4.37 and 4.38 of this guidance concerning the work which may be performed by the external auditor, including explanations of:
- the nature and extent of the internal audit work actually performed by the external auditor,
- the audit committee's judgement as to what it considers to be the benefits of using the external auditor to perform internal audit work,
- whether, in the absence of internal audit work carried out by anyone other than the external auditor, the audit committee is wholly reliant on the views of the external auditor about the effectiveness of its system of controls relating to core activities and significant locations and
- whether the committee has taken the specified steps in this guidance to satisfy themselves that the external auditor's independence and objectivity would not be impaired by his provision of the additional services.
The new bullet points that we suggest be added would, we believe, serve the valuable purpose of stressing to the committee members that not only will they be expected to state their policy on non-audit services in the annual report but they should do so in a way which satisfies investors that they have undertaken this task seriously and with due regard to how their actions will be seen by investors.
(ii) Comment on proposed amendments to paragraph 4.33 on APB Ethical Standards for Auditors
We acknowledge the importance of the APB Ethical Standards for Auditors. However, from both an audit committee and an investor perspective, we suggest it would be helpful to make this guidance as self contained as possible. While it may be reasonable to expect an audit committee to be familiar with the Ethical Standards regarding the provision of non-audit services by the external audit firm, it is unlikely that investors would be familiar with them. It would assist investors in taking a more informed view of disclosures to them if the relevant parts of the Standards were reproduced or summarised in this guidance.
(iii) Comment on proposed new paragraph 4.36 on partner rotation
It is very difficult in practice for an audit committee to assess audit 'quality' so we can only guess how an audit committee might be convinced that delaying the timing of rotation of an audit partner by up to two years is necessary to safeguard quality of the audit. It will be interesting to see what reasons will be disclosed for delay. Given the propensity for boiler plate language in corporate reporting, it seems entirely foreseeable that the general effect of this amendment to the guidance will be that rotation can be delayed by two years. We suggest the reference to quality be replaced by an alternative term which is more appropriate for practical usage.
(iv) Comment on proposed new paragraph 4.38 re Audit Related Services
In our view, 'audit related services' should be defined in the guidance. It is perhaps not reasonable to expect audit committees or investors to be familiar with, or refer to, Appendix 1 to Ethical Standard 1 issued by the Auditing Practices Board. Again, we would like the FRC Guidance on Audit Committees to be as self contained as possible.
The requirements of paragraph 4.38 should be consistent with the considerations set out within paragraph 4.8.