Transparency reporting by auditors of public interest entities
Comments from ACCA
October 2006
ACCA is pleased to comment on the above Consultation Document. Our answers to the questions raised in the Consultation Document reflect the fact that we agree with the two main considerations mentioned, namely that
- the transparency requirements should promote audit quality; and
- there should not be compulsory disclosures over and above what the Directive requires, unless a strong case is made out for this.
Q 1: Should we (i) restrict the scope of transparency reporting by audit firms to the minimum required by the 8th Directive, that is to the auditors of fully listed UK companies (Option A2); or (ii) should we align the scope with the (slightly wider) scope of inspection by the Audit Inspection Unit? (Option A1).
We believe that the required scope of reporting should be restricted to the minimum allowed by the Directive.
We are persuaded by the argument set out in paragraph 5.7 of the Consultation Document that the firms that would be affected by an extension of reporting have a minor role in the audit of public interest entities overall. There is, therefore, no significant public interest argument to justify imposing on them the costs of preparing a transparency report.
Q 2: Which of the three options on how transparency reports should be published do you favour and why? What benefits and burdens do you see with Options B2 or B3 as compared to Option B1?
We favour a requirement that does not specify the form or manner of publication beyond the need to publish on the firm's web-site (Option B1).
The Directive requires an annual, signed transparency report and sets out minimum disclosures. We do not agree with the analysis in paragraph 5.10 that Option B1 will not necessarily result in separately identifiable information. The need for a signature means that the material will either be in a separate section of a document or that the whole document comprises the transparency report (including voluntary disclosures, if any).
While the Directive sets out minimum disclosures, we believe that users may benefit from additional voluntary disclosures. We fear that a requirement for a separately identifiable transparency report would deter such reporting.
Irrespective of whether option B1 or B2 is chosen, we do not believe that there should be a requirement to provide a copy of the transparency report for inclusion in a section of the Professional Oversight Board's (POB) website. We suggest instead that such a facility could be offered to the firms (and others outside the scope of the requirements) on a voluntary basis. Indeed, if the POB wishes to improve the availability of comparative information, it could emulate the Financial Services Authority, which assists consumers by collecting information on financial products and presenting it in a manner that facilitates comparison and assessment.
Q 3: What are your views on the points raised [in Section 5] on specific disclosure requirements? Are there other points you would like us to consider?
Although some lack clarity, we do not agree that this makes it appropriate to vary the wording of the requirements from the way they are set out in the Directive (Option C2). We believe that users are better served by firms developing disclosures that meet the requirements in a way, and with such additional information as considered appropriate, that demonstrate their commitment to quality.
With respect to point (d) Internal quality control systems , we do not agree with the suggested requirements. We feel that firms that wish to do more than the minimum to demonstrate a commitment to audit quality should be able to develop voluntary disclosures suitable to that purpose.
With respect to point (f) List of the public interest entities audited in the last year , we agree that for some firms a list is likely to be so long that it would look out of place if published as part of an ‘Annual Report'. Publication on a website overcomes this drawback, however, as required disclosures may be hyperlinked as necessary. Consequently, we do not consider this a problem.
We do not believe that there is any significant advantage in going beyond the Directive to require listings of current clients. The disclosure is not intended to be a ‘who audits whom' but to give information on the capabilities of firms. We anticipate that major firms will provide voluntary summary information to highlight their capabilities in certain industries and sectors, for example in which countries their network is represented. The practical difficulties in maintaining current listings would be considerable.
With respect to point (g) Statement about the audit firm's independence practices , we do not believe that prescribing the disclosures in the way suggested is necessary. As written, the Directive allows scope for firms to meet the requirement and to differentiate themselves from others in the way they satisfy stakeholder information needs.
With respect to point (i) Financial information , while the Directive mentions various specific disclosures, it does so only as examples of financial information showing the importance of the audit firm. We see no justification for introducing detailed requirements, such as a breakdown of non-audit fees into fees from audit clients and from non-audit clients. Firms should be at liberty to highlight whatever they consider best demonstrates their importance.
With respect to point (j) Partner remuneration , we are not attracted to mandating specific disclosures, such as in relation to selling non-audit services to audit clients (which is specifically dealt with in APB Ethical Standard 4). Highlighting one such aspect could over-emphasise its importance and deter firms from reporting more important aspects.
Q 4: Do you consider that compliance with the specific obligations of Article 40; adapted along the lines discussed in this consultation document, provide a sound basis for transparency reporting by auditors of fully listed UK companies (Option D2)? If not, what additional disclosure obligations do you consider it is important to impose on audit firms (Option D1)?
As set out above, we do not believe that the requirements of the Directive need to be adapted, nor do we see a need to include any additional requirements. We support, therefore, Option D2.
There are undoubtedly other matters of interest to audit firms' stakeholders that could be addressed outside the transparency report: for example, information on liability agreements with individual companies, Audit Inspection Unit findings or legal and disciplinary matters. If the POB maintains a register of transparency reports, it may wish to collect such information and make it available in a central resource.