ACCA welcomes the opportunity to comment on the above. ACCA is the largest and fastest-growing global professional accountancy body with over 122,000 members and 325,000 students in 170 countries.
We aim to offer the first choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. ACCA works to achieve and promote the highest professional, ethical and governance standards and advance the public interest.
The proposals involve 'reportable segments', which are a further analysis to that firms may use for their: financial statements, transparency report, annual return to their Recognised Supervisory Body, and information for professional indemnity insurers. While we understand the need for a clear focus on aspects that may be used to judge 'audit profitability' we regret that more could not have been done to reduce the apparent burden of this approach.
The [draft] Code applies to any UK audit firm that is a 'transparency reporting auditor' - that is, a statutory auditor that has made an audit report on the annual accounts of one or more public interest entities at any time during the financial year of that statutory auditor.
Do you agree that the proposed scope captures the appropriate firms to report in compliance with the [draft] Code?
While such firms are captured, we believe the scope need not be so extensive. The reason underlying the disclosure of profitability is to demonstrate to possible new entrants to the market that the audit of listed companies is rewarding and hence justifies investment. In order to do this, it is not necessary for all transparency reporting auditors to be within the scope of the Code. It would suffice to restrict the 'mandatory voluntary' scope to the 'top ten' (or so) firms by size, allowing other firms, who wished to do so, to report in a 'voluntary voluntary' way. (See also our answer to question 2 below.)
The [draft] Code includes in the reportable segment:
(a) any audit required by UK statute and required to be carried out in accordance with the APB's International Standards on Auditing (UK & Ireland) and other formal guidance, and
(b) other work that 'fits naturally' with the auditor's statutory responsibilities. This is work that is required to be carried out by the auditor or that in practice tends to be carried out by the auditor.
Do you agree with the overall definition of the reportable segment?
We agree with (a) but only if, for the audit firms to which the Code applies, the reporting for all audits does not obscure the profitability of the audit of listed companies (see our answer to question 1). Firms with relatively few listed company audits may find that the overall figures are not representative of that category.
Those firms with relatively few listed company audits may be reluctant to disclose profitability of a narrowly defined category, however, as profits could be identified to a particular client or clients. This reinforces our view that the proposed scope may be too wide (see our answer to question 1).
If the scope includes all statutory audits, we see no reason to exclude voluntary audits as these also fall within the normal work of an 'audit department'. Indeed, audits under non-UK standards should be included in to give the 'wider picture'. (See our answer to question 4.)
We agree with (b) as concentration on audit and those other services that 'fit naturally' will reduce possible distortion through inconsistent inclusion of significant service lines.
Do you agree that the examples in paragraph 5 of audits to be included in the reportable segment are appropriate? Should any examples be omitted, or are there other examples that should be included?
If the scope is as set out in the draft Code (ie not restricted to the audit of listed companies and not extending to voluntary audits), we agree with the examples included in paragraph 5.
QUESTION 4: Do you agree that the examples in paragraphs 7 and 8 of directly related services to be included in or excluded from the reportable segment are appropriate?
Should any examples be omitted, or are there other examples that should be included?
Inevitably judgement will be necessary in particular circumstances, but in our view the examples are generally appropriate. It should be made explicit that directly related services are those carried out during the auditor's tenure of that office.
The inclusion of Sarbanes-Oxley attestation work is an anomaly if the scope of the Code is restricted to audits required by UK statute because it is in response to US legislation. Similarly, the example of work in relation to branch or group accounts is seemingly at variance with the primary statement of scope earlier in the Code. If these examples are retained, further explanation will be necessary to justify their inclusion.
The [draft] Code states that the basis for recognising and measuring revenue should be consistent with the firm's financial statements.
QUESTION 5: Do you agree that this is the appropriate basis for recognising and measuring revenue?
If not, why not, and what other basis would you suggest?
The [draft] Code states that direct costs and overheads should be recognised and measured on a basis consistent with that used for the firm's financial statements, and allocated to the reportable segment using appropriate bases, which should be disclosed.
Direct costs should not normally be allocated by methods such as simply applying a gross margin from a related but non-congruent business segment.
Overheads may be allocated by reference to staff numbers or costs, or by using more general methods, as appropriate. Reporting firms should disclose the impact of material non-recurring or 'lumpy' costs.
Do you agree that direct costs should not normally be allocated by methods such as applying a gross margin from another business segment?
Do you agree that overheads should be allocated to the reportable segment?
Yes. We note that the Code proposes no separate disclosure of the types of overhead but proposes disclosure of 'lumpy' costs. In our view the latter only makes sense if users are also given information on the main constituents of allocated overheads.
Do you agree that the proposed guidance on allocating overheads achieves an appropriate balance between minimising prescription for preparers while achieving comparability between firms?
Yes. Ideally, users of disclosures under the Code should be able to form an understanding of the extent to which the 'gross profit' of the sector is needed to service the overheads and hence what 'net profit' remains. The need for comparability between firms is not important in itself but only as a guide to the accuracy of the figures for the sector.
QUESTION 9 : Do you agree that reporting firms should disclose the impact of material non-recurring or 'lumpy' costs, in order to highlight their effect on profitability?
Yes. However, see our response to question 7.
QUESTION 9 continued : Will the current guidance achieve sufficient comparability between firms, or is further guidance needed on the identification and disclosure of such costs?
The current guidance may prove sufficient but further guidance could be necessary. For example, if a firm incurs 'costs' integrating another audit firm following a merger, how should that be treated? If a firm changes the nature of its global network, should any changes in related costs be classified as 'lumpy'?
The [draft] Code states that the basis of accounting for members' or partners' remuneration should be consistent with the firm's legal structure.
Do you agree that the basis of accounting for members' or partners' remuneration should be consistent with the firm's legal structure, with disclosure of the basis and the extent of allocation to the reportable segment?
The [draft] Code allows disclosure in either the reporting firm's Annual Report or Transparency Report.
Do you agree with the option to disclose in either the Annual Report or the Transparency Report?
We agree that there is no need to specify which report must be used. We have a preference for disclosure in the annual report because the Code refers to consistency with the financial statements. This would also facilitate independent assurance that the disclosures were not inconsistent with the financial statements.
However, the FRC has already in effect added consideration of the Audit Quality Framework to the Transparency Report and, as an FRC inspired disclosure, it would be consistent for the Code to specify inclusion in that Report (in the long term if not immediately) if the FRC was satisfied that it did not dilute the presentation of its prescribed content.
It is proposed that disclosure under the [draft] Code should be implemented in respect of accounting periods beginning on or after 1 April 2009.
Question 12 : Do you agree with the proposals for the timing of implementation of the [draft] Code?
Last updated: 11 Apr 2012