The Audit Profession Organising the Profession

MODULE 5

THE AUDIT PROFESSION – ORGANISING THE PROFESSION

THE ROLE OF THE PROFESSIONAL INSTITUTE

PRE-READING MATERIAL

The FinancialReportingCouncil

Corporate Governance

Developing Financial Reporting Standards, reviewing compliance

DevelopingD audit standards
and reviewing compliance &
audit quality

Investigation & Discipline

Statutory and non statutory oversight of accountancy and audit

Developing audit standards and reviewing compliance & audit quality

Developing audit standards
and reviewing compliance &
audit quality

FRRP

• Ensures financial information provided

by companies complies with relevant

reporting requirements.

Now proactive, previously reactive

Risk based approach
Extended remit

Accountancy Investigation and

Discipline Board

Independent investigation and disciplinary

body for accountants in the UK

All members not just auditors
Participating bodies are ICAEW, ACCA,

CIMA, CIPFA

Takes over from the Joint Disciplinary

Scheme (JDS)

Focus on Public Interest cases

Auditing Practices Board

Previously part of the old Accountancy

Foundation

Remit now extended to developing

ethical standards for auditors on

independence, objectivity and

independence

Professional Oversight Board

In relation to audit

Recognition of accountancy bodies to act as

supervisory bodies and offer professional

qualifications

Reviewing compliance of supervisory and

qualifying bodies with statutory requirements

Through the AIU monitoring the quality of the

auditing function of economically significant

entities

With regard to the accountancy profession

Reviewing the regulatory activities of the

accountancy bodies in relation to their members

SELF-regulation, not delegated

regulation

Statute governs the mechanism, not the

operations of audit regulation

Opportunity to define self-regulation, not

merely operate to a Government

prescription

How to make it work best?

How to make it work best?

Monitoring audit firms for audit quality,competence, and ethical behaviour is a

statutory requirement

How monitoring is carried out is up to the

professional body

The professional body should use that

discretion to best advantage

How to make it work best?

The first key is - do as much `desktop` monitoring

as possible

Have a reliable risk management & business

information system

Information about the audit firm and its audit

engagements

Identify firms with the riskiest engagements

(investment trust audits, property development

companies)

Monitor those firms first

The rules of natural justice in

operation

Two contexts - regulatory (licensing) and

disciplinary (professional conduct), which should

be kept several and distinct: regulation is forward

looking, dealing with entitlements to practise;

discipline is retrospective and retributive in

character

As much freedom of action in the regulatory sense

as possible needs to be retained

Keep the licensing system simple - make

decisions with the firm fully informed, able to make

representations (written and oral), and have an

appeal forum available

Misconduct (conflict of interest, wilful misrepresentation of

accounts, `wilful blindness'

Elements of Investigation of Complaints

Quality

Speed

- Fairness

the Adversarial System is common (but not necessarily

best)

- Investigation Committee

- Discipline Tribunal

Appeal Committee

Investigation Committee11

comprises CA and non CAs (Public Interest Members)
Responsible for investigations of allegations that member

or CA Student is (i) guilty of professional misconduct or (ii)

has performed his professional work in such a way as to

bring the Institute into disrepute or (iii) has committed a

breach of the Rules.

Power to delegate to sub-Committee

∎ Where Investigation Committee of opinion12

that case of misconduct made out it may:

Determine that no further action should be

taken on the complaint

Prefer a formal complaint to the Institute's

Discipline Tribunal (APP or Full Hearing)

Discipline tribunal13

Right to an impartial tribunal
Right to adequate notification of charge
Right to answer charges
Ultimate right to appeal to Appeal Committee or

Judicial Review (court intervention)

THE
INSTITUTE OF
CHARTERED
ACCOUNTANTS
OF SCOTLAND

Where is the Regulation of Audit

going?

Governmental interest in the

liberal professions takes on a

more proactive form

Government's objective ---> create a

new, single, independent regulator

to strengthen the foundations of the UK's

capital markets for the long term

The function of FRC

Set accounting and auditing standards
Proactively enforce them
Oversee the self-regulatory professional

bodies

From systemic adequacy to

`credibility review'

∎ First phase of public oversight (from 1992 2004)

saw audit monitoring concentrate on the systemic

capabilities of audit firms - to ensure that they had

conflict of interest avoidance mechanisms and

review mechanisms in place

∎ The new phase (2005- ) will be to introduce

`credibility-review' = ensuring that firms reach

sustainable professional judgements and

conclusions

New UK legislation

∎ The first year of the FRC's operations will be

governed by bilateral, contractual arrangements

between FRC and the self-regulating bodies, to

give government time to introduce legislation

underpinning FRC as a `designated person' under

the Companies (Audit, Investigations,...) Act 2004

∎ The new statutory framework under the Act will

ensure a balance between the legitimate private

interests of the auditing profession and the

oversight `overlay'

Government prescription still leaves19

important role for the self-regulating

bodies

Public oversight is in partnership with and

complementary to the private auditing and

accounting institutions, not substitutive of them

Government lays emphasis on a stricter regime for

audit but still relies on the private self-regulating

bodies for standard-setting in every aspect of

accountancy practice, includingaudit

Inter-relationship of URlaw and 20

practice with European Community

norms

∎ Introduction of `from cradle to grave' audit

practice oversight, not just an emphasis on

competence and `fitness and propriety' of

auditors at the point of registration by the

audit regulation

The phenomenon of extra 21

territoriality

∎ The effect of foreign legislation like the US

Sarbanes-Oxley Act and its new Public

Company Accounting Oversight Board

extends the geographical outreach of

national oversight norms

∎ International auditing standards need to

keep pace with national legislative

techniques

The legal obligation becomes ethical

∎The bare statutory obligation has, since 1989, been translated as an ethical one by the audit self-regulating bodies, lie the Institute of Chartered Accountants of Scotland

∎Obligations like independence and integrity constitute absolutes of professional behaviour

The ethical obligations

• The rules of professional conduct have

traditionally been written in ethereal clothing,

rather than prescriptive regulations and

prohibitions

Those days are gone
Whereas new `ethical rules' have been

called `ethical guidance', they are virtually

prescriptive in nature and look far more like

professional laws than guidance

The ethical obligations (continued)

∎ The prescriptive nature of these new

obligations is no accident but another echo

of government's intention that the audit (as

opposed to the rest of public practice)

environment is, by design, to be much

tougher and exacting

∎ The APB is promulgating the new guidance,

covering the following topic