Audit Policy Update

• European Commission publishes analysis of responses to its corporate reporting consultation
• ESMA updates the ESEF Reporting Manual
• Audit quality continues to improve in the UK

European Commission publishes analysis of responses to its corporate reporting consultation

The European Commission (EC) published in July the analysis of the responses to the corporate reporting public consultation to which Accountancy Europe responded earlier this year. Find it at this link.

Some of the main points include:

• of the three components of the corporate reporting ecosystem, respondents considered corporate governance as the weakest area. Especially boards’ responsibility, reporting and related supervision are areas that need improving most
• respondents considered the EU framework on statutory audit overall as effective, but not necessarily efficient and coherent. Concerning the supervision by public authorities of statutory auditors/audit firms, including Member States’ systems of investigations and sanctions, respondents considered this to be rather effective, efficient and coherent. Over 82% of respondents agreed that statutory audits contribute to the quality and reliability of public interest entities’ (PIEs) corporate reporting. Nevertheless, for the statutory audit and its supervision, around two thirds of respondents were neutral or rather agreed that these pillars needed improvement, including:
  • simplification and enhanced harmonisation by removing/reducing Member State options, including on auditors’ mandatory rotation and provision of non-audit services
  • increased consistency of supervision of cross-border networks of audit firms
  • having legal instruments at European level to foster supervisory convergence
• respondents had diverging views on the measures proposed in the consultation on how to improve audit quality. Views were particularly split on joint audit
• majority of respondents agreed that specific indicators were useful to measure the quality of corporate reporting, statutory audits and the effectiveness of supervision – but respondents were generally sceptical about the ability to develop such indicators

The mentioned next steps do not give detail or timeline but indicate that the results of the public consultation will be reflected in any future EC initiative in this context.

In any future work, the EC will also consider the upcoming study by the Center for European Policy Studies (CEPS). The study will provide data and analysis to help the EC carry out an assessment of the current EU regulatory framework on audit, which has been in place since 2014.

EC extends adequacy and equivalence for US audit oversight authorities

The EC adopted on 25 July two new decisions (here and here) to extend the equivalence and adequacy of the US competent authorities, the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) in the field of statutory auditing for a further six years, until the end of July 2028. These decisions thus extend the current agreement, which was set to expire at the end of July.

The decisions will allow EU audit supervisors to continue cooperating with their US counterparts in overseeing the audit industry.

ESMA updates the ESEF Reporting Manual

The European Securities and Markets Authority (ESMA) has completed the annual update of the European Single Electronic Format (ESEF) Reporting Manual.

It now includes technical guidance on the construction of a block tag and ESMA’s expectations for annual financial reports prepared in more than one language.

Issuers and software firms are expected to follow the guidance when preparing annual financial reports for 2022.

Read more

IAASB guidance for identifying and assessing the risks of material misstatement in an audit

The International Auditing and Assurance Standards Board (IAASB) issued first-time implementation guide for International Standard on Auditing (ISA) 315 Identifying and Assessing the Risks of Material Misstatement. The guide focuses on the key changes made and aims to help stakeholders understand and apply the revised standard as intended.

ISA 315 is effective for financial statements audits for periods beginning on or after 15 December 2021.

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FAQs on reporting going concern matters in the auditor’s report

The IAASB issued frequently asked questions for reporting going concern matters in the auditor’s report in accordance with extant ISAs.

The IAASB is in the process of revising ISA 570 Going Concern and an exposure draft is expected to be published in the first half of 2023.

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FRC sets out its next steps in the context of UK’s audit and corporate governance reform

The Financial Reporting Council (FRC) published in July a Position Paper setting out the next steps to reform the UK’s audit and corporate governance framework.

The paper follows the Government Response to the consultation on strengthening the UK’s Corporate Governance, Corporate Reporting and Audit Systems, including the creation of the Audit, Reporting and Governance Authority (ARGA), to take over from the FRC.

The FRC builds on the areas of the Government Response that fall within its remit, to provide advanced clarity for stakeholders on how the work of reform will be delivered ahead of government legislation. That work includes revising existing codes, strengthening auditing and accounting standards, setting expectations to drive behavioural change ahead of statutory powers, and the development of guidance to address issues set out in the Government Response.

To hear more about the FRC’s proposed approach and what’s next across key policy areas, follow this podcast and webinar.

Audit quality continues to improve in the UK

The FRC published its annual inspection and supervision results of the largest audit firms (BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars and PwC). Overall, audit quality continues to improve at the largest audit firms and on the largest audits. 75% of audits inspected were good or required limited improvement (compared to 71% in 2021 and 67% in 2020).

However, the report also highlights that:

• the improvement must speed up to meet the demands of the market
• some firms have been growing too fast, picking up higher risk audits being dropped by their peers, without adequate controls to ensure high quality audits

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Dutch study on collaboration in the performance of statutory audits

The Dutch Authority for the Financial Markets (AFM) published a study on collaboration of audit firms. The study looked at 16 audit firms and concludes that:

• collaboration between audit firms can contribute to the quality of statutory audits, provided that proper quality safeguards are established
• intensity of collaboration in the performance of statutory audits varies
• extent of collaboration affects risks and requires safeguards

Read more here and download the study (in Dutch) here.