Audit Policy Update

• One-year delay option for ESEF granted, Accountancy Europe’s new webpage on ESEF implementation
• European Parliament’s ECON Committee hosts Steven Maijoor to present ESMA report on Wirecard
• Investors call on Europe’s largest companies to deliver ‘Paris-aligned’ accounts
• In 2021, CEAOB plans to look into risks related to fraud and going concern and developments on Brexit
• The 2014 EU audit legislation ‘has had mixed results’ according to the latest Audit Analytics’ report
• IAASB details plans for developing separate standard for audit of less complex entities
• UK: Government specifies accounting and audit framework from 1 January 2021 in view of Brexit
• UK: Audit firms enhance going concern assessments

One-year delay option for ESEF granted, Accountancy Europe’s new webpage on ESEF implementation

Issuers of European Union (EU) regulated markets were supposed to prepare their 2020 annual financial reports in accordance with European Single Electronic Format (ESEF) requirements.

However, the European Parliament (EP) and the Council agreed to an amendment of the Transparency Directive allowing EU member states to delay the application of the ESEF requirements by one year. Member states shall notify the European Commission (EC) of their intention to do so along with their sufficiently justified reasons.

We decided to set up a dedicated webpage on ESEF implementation and as a first step, we gathered all key publications and guidance available for ESEF reporting and assurance. These include documents published by the EC, the European Securities and Markets Authority (ESMA), the Committee of European Auditing Oversight Bodies (CEAOB) and Accountancy Europe.

We will be regularly updating this page to reflect the implementation status. This will include adding information, in early 2021, on which member states choose to use the delay option.

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European Parliament’s ECON Committee hosts Steven Maijoor to present ESMA report on Wirecard

On 3 December, ESMA’s outgoing (from March 2021) Chair Steven Maijoor attended an EP’s Committee on Economic and Monetary Affairs (ECON) hearing to give an overview of the main conclusions of ESMA’s peer review report on Germany’s supervision of financial reporting in the Wirecard case.

At the hearing, Mr. Maijoor presented the main recommendations from the report, but warned against drawing too many general conclusions from the investigation of a specific case (Wirecard) in a specific country (Germany). However, he contended that in the areas of information exchange between authorities some general improvements could be made in Europe. Moreover, he suggested the possibility of making ESMA’s soft guidelines on enforcement of financial reporting into a legal obligation (level 2 legislation under EU law). ESMA would present its thinking on these matters in January 2021, he indicated.  Mr Maijoor also expressed his personal opinion on concerns about conflicts of interest in the audit sector.

Investors call on Europe’s largest companies to deliver ‘Paris-aligned’ accounts

The Institutional Investors Groups on Climate Change (IIGCC) wrote to the 36 largest European companies to share their expectations for directors and auditors to deliver accounts that properly reflect the impact of getting to net zero emissions by 2050. The call is accompanied with their Investor Expectations report and sets out five clear steps companies must take when preparing ‘Paris-aligned’ accounts:

• an affirmation that the goals of the Paris Agreement have been considered in drawing up the accounts
• adjustments to critical assumptions and estimates
• sensitivity analysis
• divided resilience
• consistency

It also outlines specific expectations for auditors to call out where accounts are ignoring material climate risks and whether or not the accounts can be considered Paris-aligned. Read more

In addition – but independently from IIGCC’s call – International Financial Reporting Standards (IFRS) Foundation published educational material to highlight how existing Standards require companies to consider climate-related matters when their effect is material to the financial statements. It is aimed to support the consistent application of IFRS Standards; it does not add to or change the requirements in the Standards. Read more

In 2021, CEAOB plans to look into risks related to fraud and going concern and developments on Brexit

Following its last 2020 Plenary meeting, the CEAOB shared its 2021 Work plan and subgroups activities.

The programme highlights, for example, the likely existence of a higher risk of default and fraud resulting from covid-19 leading to a higher level of expectation towards auditors and their supervisors. CEAOB also intends to look at developments related to Brexit and potential consequences for national competent authorities and the CEAOB. Read more

In addition to the first point above, the Inspection subgroup underlines that it will put a special focus in the next 12 to 18 months on the increased risks. In particular, this relates to going concern and fraud aspects and how the audit firms have taken actions to respond to these risks. Read more

Mr. Maijoor also expressed his personal opinion on concerns about conflicts on interest in the audit sector.

The 2014 EU audit legislation ‘has had mixed results’ according to the latest Audit Analytics’ report

Audit Analytics (AA), a US independent provider of audit intelligence, suggests that the 2014 EU audit legislation has had only a limited positive impact on independence and concentration of auditors, while coming at some cost.

AA presents this conclusion in their latest report: ‘Monitoring the audit market in Europe’. The focus is set on the concentration in the audit market and the impact of mandatory audit firm rotation and prohibitions of non-audit services on the market structure. Read more (after entering your email address)

UK: Government specifies accounting and audit framework from 1 January 2021 in view of Brexit

The Government and the Financial Reporting Council (FRC) have published letters to the accounting and audit sectors setting out the UK framework for audit and reporting at the end of the transition period.

It follows the webinar hosted by the Department for Business, Energy & Industrial Strategy (BEIS) on 6 November (available here).

The letter addressed to accounting and corporate reporting is particularly relevant for UK incorporated companies, multinational groups with a UK and EEA presence and UK and EEA companies with cross-border listings. It lays down general requirements and the changes to certain filing exemptions.

The letter addressed to auditors and audit firms focuses on the following areas:

• recognition of qualifications
• management and voting rights rules
• third country audit firms
• the EU Audit Regulation
• group audits
• audit committees
• audit exemptions

Read more

In the same context, the BEIS Department held a webinar on 15 December to provide the audit and accounting sector with information on the actions that they need to take to be ready from 1 January 2021. Read more

UK: Audit firms enhance going concern assessments

The additional policies and procedures on going concern introduced earlier in the year had been substantially applied in practice, according to a review of completed audits by the UK FRC. This has improved the evaluation of companies’ going concern assessments since the start of the covid-19 pandemic.

The positive aspects are the level of challenge to company boards and management about their key assumption, stress testing and disclosure in the financial statements.

However, in some cases, the consideration of the going concern assessment period and the approach to test the integrity of the forecasting models need to be improved. Read more

IAASB details plans for developing separate standard for audit of less complex entities

During its December 2020 meeting, the International Auditing and Assurance Standards Board (IAASB) held its first public discussions on the draft of a separate standard being developed for an audit of less complex entities. It also discussed the official project proposal to complete and publish the draft standard for public consultation in 2021. The IAASB approved the project proposal and early draft.

Following these decisions, the IAASB published a new communique detailing plans for the new standard, including current thinking on what the standard will look like, what entities it will apply to and the development timeline.