Comments from ACCA to the International Auditing and Assurance Standards Board (IAASB), April 2011.
Executive Summary
ACCA welcomes the opportunity to provide views on the International Auditing and Assurance Standards Board's (IAASB) proposed Strategy and Work Program for 2012-2014. We were pleased to respond to related earlier consultation initiatives and are satisfied that the strategy and work programme now provides a well balanced approach that we generally support.
In these comments we answer the specific questions asked in the consultation paper and highlight two matters to which we believe the IAASB should pay particular attention.
We continue to suggest a full consideration of the fundamental principles of assurance and the objectives and nature of engagement standards, as that would inform the issue and revision of all IAASB standards. Such work should necessarily consider how to reconcile, for auditing standards, the needs of capital markets, heightened by the credit crisis, and the needs of the small and medium-sized entity (SME) sector.
We call for acceleration of a planned revision of ISRS 4400 Engagements to Perform Agreed-upon Procedures Regarding Financial Information, or at least the inclusion of consideration of such engagements and hybrid engagements in the finalisation of the current revisions to review and compilation standards. This would result in more 'joined-up' standards for the types of engagement that are more common for SMEs and allow users to comprehend, compare and commission the engagement that best meets their needs.
We conclude our response by considering what opportunities may exist for the IAASB to partner with others to facilitate implementation of the clarified International Standards on Auditing (ISAs). As a global organisation, and a staunch supporter of the International Federation of Accountants, we want to ensure that such standards are implemented successfully in all countries and we welcome any further opportunities to partner with the IAASB to achieve this.
General Comments
ACCA welcomes the opportunity to respond to the consultation paper Proposed IAASB Strategy and Work Program for 2012-2014 (the proposals) issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC).
ACCA was pleased to provide early input to the proposals, including responding to an April 2010 strategy survey. We recognise that the extensive consultation process to date has resulted in proposals that balance the needs of stakeholder groups. We commend the clear and informative way in which the proposals and the thinking behind them are set out in the consultation paper. We are generally supportive of the proposals as now presented.
We have structured our response to address those matters that are highlighted as being of particular interest to the IAASB and, in the next section of this response, we answer the specific questions posed in the consultation paper.
We agree with the need to allocate a large proportion of the available resources to facilitating the adoption and implementation of the clarified ISAs and to monitoring that, so as to be able to learn lessons and respond as necessary.
For the period under consideration, a study of the projects categorised as 'current', 'likely to commence' and 'suggested additional' leads to the conclusion that there is more that should be done than can be done. In addition to the work relating to the clarified ISAs, there is now a pressing need to revise those standards for assurance and related services that are becoming more relevant to jurisdictions where smaller entities are exempt from statutory audit.
We believe that a comprehensive suite of up-to-date standards is required to support the provision of services by professional accountants in practice that add credibility, in particular, to published financial statements. The success of those standards will be judged by the extent to which they are adopted and applied and that will depend on their value to users - which depends on the value of the credibility that the practitioner adds to the published information. For this reason, as set out in detail in the next section of this response, we call for acceleration of work on agreed-upon procedures engagements and consideration of hybrid engagements during the finalisation of standards for reviews and compilation engagements.
The SME sector is of vital significance to the global economy and we also call for a renewed focus on quality control, not only for assurance and related services engagement but also the smaller audit. While International Standard on Quality Control 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements is capable of proportionate application it is, nevertheless, not an ideal document to be used by smaller practitioners. While we would give high priority to the suggested additional project C.8 (further assistance on implementation), consideration should also be given to whether a 'think small first' approach would be more successful for quality control standards and indeed, in the long term, for ISAs themselves.
We continue to call for the fundamental principles of assurance to be included in the work programme. We recognise that such a project will be difficult and long-term, but it is necessary to have a theoretical underpinning for decisions taken in drafting standards.
In our separate comments on the exposure draft of proposed ISRS 4410 Compilation Engagements we expressed concern about the inclusion in it of a requirement for the reason that it was 'consistent with the ISAs'. In that response, we pointed out difficulties with other requirements and concluded that 'This circumstance reinforces our long-held view (for example expressed at the commencement of the ISA clarity project) that standard setting would be improved by a theoretical underpinning.' To minimise the need for IAASB resources, we suggest that the early stages of such a project could be undertaken by academics and other parties external to the IAASB.
Should the IAASB have any questions about our response, or require further information, please contact in the first instance:
David York, Head of Auditing Practice, at david.york@accaglobal.com
Matters on which Specific Questions are Asked
In this section of our response we answer the specific questions asked in the consultation paper.
Paragraph 15(a)
Whether the IAASB's three areas of strategic focus noted in paragraphs 7-11 remain appropriate?
Yes; these are an appropriate focus for the 2012-2014 strategy.
The standard setting area is, however, where long-standing tensions are becoming more apparent. The consultation paper itself identifies a challenge to achieve an appropriate balance in setting 'standards that meet the needs of capital markets, while also meeting the needs of SMEs that are equally important to the global economy.' Auditing standards are the most visible area of such tensions.
ACCA has recently carried out research in centres across the world that has highlighted how the role of audit is currently under heightened scrutiny. The global financial upheaval of the past three years has seen commentators questioning the value of large company audit. The political and regulatory response, such as the European Commission Green Paper Audit Policy: Lessons from the Crisis, has focussed on the audit of public interest entities for which greater professional scepticism and 'higher standards' are demanded.
If the IAASB responds to such pressures in relation to public interest entities by further strengthening auditing standards, the relevance of audit to the needs of SMEs becomes more difficult to justify. It is not simply a matter of ease of use of ISAs that is to the detriment of the SME sector; more importantly, it is the setting of a level of 'reasonable assurance' that is only demanded by capital markets, which overburdens smaller entity audits.
There is much to recommend the current IAASB approach that 'an audit is an audit' but, given the pressures acknowledged above, there must be doubts about how long that position can be held. If reasonable assurance continues to be increased to meet capital market demands the inevitable consequence is that audit becomes too expensive for other entities. Theoretically, potential long-term solutions (assuming assurance is valuable for SMEs) are either to introduce an engagement in which limited assurance is at an appropriately high level, or to develop the concept of reasonable assurance to allow the user's understanding of the audit to accommodate the differing circumstances of the engagement, including the level of public interest in the audited entity. This may also be a factor relevant to the exercise of professional judgement, the importance of which the IAASB rightly emphasises.
This is one reason why ACCA calls elsewhere in this response for the IAASB to undertake work on the fundamental principles of assurance.
Paragraph 15(b)
Whether the list of anticipated projects likely to commence in 2012-2014 (Column B) adequately address issues currently facing the accounting and auditing professions, in particular:
All the projects in Column B are consistent with the IAASB's strategic focus. Several of the projects are planned reactions to findings that are currently unknown. To some extent they will be self-selecting depending on what is actually found and we do not speculate on that. In our view the most important projects are B.1 and B.4, as they respond to findings of the ISA Implementation Monitoring project, and B.2 a revision of ISRS 4400.
Because of the current projects to revise ISRE 2400 Engagements to Review Historical Financial Statements and ISRS 4410, we are strongly of the opinion that it is necessary to address project B.2 as a matter of urgency so that all the 'non-audit' standards relating to historical financial information are updated and available for use as soon as possible. This allows engaging parties to chose the type of engagement that best meets their needs.
Irrespective of the timing of work on ISRS 4400 itself, there are two reasons why it is important to consider agreed-upon procedures during the finalisation of ISRE 2400 and ISRS 4410. Firstly, if those revised standards are issued in advance of ISRS 4400 they must make appropriate allowance for the fact that they may be used in conjunction with agreed-upon procedures in a hybrid engagement. While agreed-upon procedures would be an addition to a compilation, such procedures in conjunction with a review could also be considered to form part of the review (with implications for whether assurance is communicated or not). As a minimum, guidance is necessary on the simultaneous use of the revised standards with the extant agreed-upon procedures standard.
Secondly, the finalisation of ISRE 2400 and ISRS 4410 should include consideration of the theoretical aspects of assurance and user confidence in financial information. In doing so, it is necessary to consider the user perspective on agreed-upon procedures. In our separate comments on the exposure draft of proposed ISRS 4410, we expressed concern about the inclusion in it of a requirement for the reason that it was 'consistent with the ISAs'. In that response, we pointed out difficulties with other requirements and concluded that 'This circumstance reinforces our long-held view (for example expressed at the commencement of the ISA clarity project) that standard setting would be improved by a theoretical underpinning.'
Accordingly, we call for at least some work on the fundamental principles of assurance to be included in the project on 'audit quality' and indeed that that project should include quality issues for non-audit engagements, which are important for SMEs. In addressing audit quality it is important to 'think small first' so that the drivers of quality in the SME environment receive appropriate attention.
We note that the timing of project A.10 - develop a publication on the meaning of an audit, is linked to the finalisation of the IAASB's projects to revise ISRE 2400 and ISRS 4410 in order to more clearly differentiate the various services and their related types of assurance. We consider that such a publication must also deal with agreed-upon procedures and hybrid engagements as these may also be commissioned from professional accountants.
Paragraph 15(c)
With respect to the additional projects (Column C):
(i)
Each of the projects in column C has merit. Such projects either involve keeping a watch on developments or demand, or the document concerned would fall into the International Standards on Assurance Engagements series and would be best addressed once ISAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information is finalised (project A.6). As a consequence, we would not prioritise any of these projects above those in columns A or B.
(ii)
Given the early stage of development of integrated reporting, in comparison to sustainability reporting, we would not expect related monitoring work to be substantial (project C.3).
Paragraph 15 (d)
Whether there are additional actions or projects that respondents believe should be addressed, and, if so, how these should be prioritized in relation to the projects identified in Columns B and C?
We welcome currently advances in the thinking on matters such as professional judgement, the wider aspects of audit quality and in reporting to users, but we continue to believe that work on the fundamental principles of assurance should be a high priority. It is undoubtedly a difficult and long-term project but if it is not carried out there will continue to be difficulties with standard setting because of the absence of a theoretical underpinning for decisions taken in drafting. We refer to some current examples in our answer to the questions in paragraph 15(b).
To minimise the need for IAASB resources, we suggest that the early stages of such a project could be undertaken by academics and other parties external to the IAASB.
Paragraph 16
. . . select the top three projects either from, or in addition to, the list of suggestions for additional projects (Column C) that they believe would best meet the IAASB's public interest mandate?
Judging projects against the 'public interest mandate' has to be seen in the light of the IAASB's own statement that its standard setting contributes to 'strengthened public confidence in financial reporting'. A project can be judged on the basis of the extent to which something is improved (or appears to improve) and the extent to which that improvement affects financial reporting generally. Thus, projects which have wide ranging effects are more likely to have a high impact on the public interest. Under this approach we suggest that the following are the 'top three projects':
Work on the fundamental principles of assurance - because this can have an effect through improving the quality of all IAASB pronouncements (see our answer to the question in paragraph 15(d))
Measures to assist in implementation of ISQC 1 for smaller firms - because of the vast number of engagements carried out by such firms (project C.8)
Material on audit of financial statements and prudential regulation of banks - because that may reduce the risk of a further global credit crisis (project C.1)
Paragraph 17
. . . which one project (either from Column B, Column C or an additional action not included in either column) respondents would identify as the IAASB's top priority?
In our answer to question 15 we made the case for work on the fundamental principles. We also emphasised the importance of project B.2 (revise ISRS 4400). If 'top priority', for the purposes of this question is primarily a matter of timeliness, however, project B.1 may demand urgency depending on the findings of the ISA Implementation Monitoring project.
Paragraph 18(a)
What types of publications or further implementation guidance may be of most use to facilitate the adoption and implementation of the IAASB's pronouncements?
We welcome the efforts made so far to assist the implementation process for the clarified ISAs. As other assurance and related services standards are revised, we believe that the most pressing communication need is to provide potential users with a means of appreciating the differences between the types of engagement and their respective merits. Although it is for practitioners to communicate with potential clients, there remains a need for more general communication, for example with banks and other credit industry members about the services a professional accountant can provide. This should form part of the consideration under project B.6.
As well as publications providing information that will build demand for engagements in accordance with IAASB standards, we also suggest that there should be implementation guidance for practitioners on the revised standards. This should focus on review and hybrid engagements as the technical competencies for a compilation will already be in place in smaller practices. This guidance should include advice on the proportionate application of ISQC 1 and we welcome, therefore, project C.8.
Paragraph 18(b)
What opportunities may exist for the IAASB to partner with others to facilitate implementation of the clarified ISAs (for example, IFAC member bodies, national standard setters, training organizations, and others)?
The audit and assurance papers for the ACCA Qualification are based on international standards and those studying towards them develop an appropriate understanding, which facilitates implementation of the
clarified ISAs.
ACCA has been making considerable efforts to facilitate implementation of the clarified ISAs, for example through publicity in our publications, and making available practical ISA implementation courses and on-line materials for continuing professional development. Much of this has been available free for download and we hope that our sharing of material has assisted a wide range of bodies and individual auditors with implementation.
ACCA also has an updated CD-ROM based product known as 'ACCA International Audit Programmes' which is designed to facilitate compliance by auditors with the clarified ISAs. It is suitable for audit engagements carried out for entities in all jurisdictions where the clarified ISAs are in use.
As a global organisation, and a staunch supporter of IFAC, we want to ensure that international standards are implemented successfully in all countries and we would welcome any further opportunities to partner with the IAASB to achieve this.