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Crowe Horwath Reporting Insights

2016 - Issue 2

Director's Update

David ChittyWelcome to the second edition of Crowe Horwath Reporting Insights, Crowe Horwath International's newsletter for clients and contacts about developments in financial reporting and audit.

In this issue we present some commentary on the implementation and significance of the EU Audit Regulation and Directive that came into law in the Member States of the EU on 17 June 2016. The Regulation and Directive have an impact on governance and on how businesses work with their auditors. This legislative development in Europe is influencing audit regulation in many other countries.

We also discuss the result of the recent referendum in the United Kingdom on membership of the European Union and the political and economic implications that extend far beyond, as well as the potential implications of Brexit for accounting and audit standard setting.

We welcome comments about our newsletter. I can be contacted at david.chitty@crowehorwath.net. Follow me on Twitter @davidwkchitty1. You can also find me on LinkedIn.

David Chitty
International Accounting & Audit Director


Business Performance Linked to Use of Accountants

The International Federation of Accountants (IFAC released a new research report that shows the positive impact on business performance when companies use professional accountants for expertise and advice.

The research also shows that accountants have a positive impact on aligning an organizations' goals and actions. They are suited to play different organizational roles, including analysis and communication of information, decision making, managing risks, and creating sustainable value.

Read the full report here.


Audit Market Reform

By Professor George Venieris
Hellenic Accounting & Auditing Standards Oversight Board
Athens, Greece

The European Union (EU) audit market reform began in 2010 with a European Commission (EC)  consultation Green Paper entitled "Audit Policy: Lessons from the Crisis." After the consultation process, the EC released its Proposals in November 2011. After nearly three more years of discussion, the final legislation was published in the Official Journal of the EU in 2014.

The legislation consists of:
  • The Directive 2014/56/EU on statutory audits of annual accounts and consolidated accounts, amending Directive 2006/43/EC on statutory audits and containing a series of amended and new requirements governing every statutory audit in the EU,  and
  • The Regulation (EU) No 537/2014 on statutory audit of Public Interest Entities (PIEs) containing additional requirements that relate specifically to statutory audits of PIEs in addition to the ones stated in the Directive 2014/56/EU.
The Regulation is expected to apply from 17 June 2016 while the Directive has yet to be incorporated into the national legislation of the Member States. These laws are intended to improve audit quality and increase market efficiency in the provision of audit and audit-related services throughout the EU.

The new legislation seeks to open up the EU audit services market beyond the dominant "Big 4" audit firms and remedy auditing weaknesses revealed by the financial crisis. Its proponents are saying that the new rules will weaken the dominance of the "Big 4" while critics say that the reform will be a paper tiger unable to break up their dominant position. What will happen eventually remains to be seen in practice.
  • From the profession's point of view the effects are expected to be: The improvement of the communicative value of the auditor's report, and
  • The enhanced role of the audit committee.
More analytically, the primary objective of the reform is to increase the quality of the statutory audit. This means both enhancing statutory auditors' independence and providing investors and shareholders of audited entities with better and more detailed information via the audit report. The reform differentiates audit reports for non-PIEs and for PIEs and imposes further requirements on the latter. By doing so, it aims to reduce the 'expectation gap' that often exists between the perception of what auditors should be delivering and what they are bound to deliver. Next, the additional report to the audit committee, which is to be prepared only when auditing PIEs, aims to increase further audit quality and avoid any loopholes, via enhanced communication between the statutory auditor or the audit firm on the one hand and the entity's audit committee on the other. The additional report will provide the audited PIE with more detailed information on the outcome of the statutory audit, including more information on the methodology used, on possible significant deficiencies identified in the internal control system, on the valuation methods applied, and so on.

As a conclusion it could be said that the faster the adoption of the reform the better the quality of the audits.

BREXIT - What Does it Mean?

Commentary by David Chitty, International Audit & Accounting Director
On 23 June 2016, the United Kingdom voted to leave the European Union (EU).
Market reactions have shown this vote has far reaching and global implications. The United Kingdom's exit from the EU (referred to as "Brexit") will now involve complicated and highly political negotiations, and could take some time to complete. Initial market reaction could, in part, be put down to this uncertainty.
Brexit gives rise to many practical questions for businesses and investors. Crowe Horwath International's UK member firm, Crowe Clark Whitehill LLP, has set up a Brexit Hub that presents commentary on short term and long-term issues facing the UK. The content of the Hub will evolve as the UK's negotiations with the EU progress towards a conclusion and the questions that give rise to the current uncertainty start to be addressed. In addition, Crowe Horwath International is introducing a global hub that presents articles and commentaries on the issues facing those businesses and investors that are looking to work with the UK and the EU, as well as businesses and investors in the continuing 27 Member States. We present in this newsletter an article that considers the implications for accounting and auditing standard setting.
For the time being, the UK remains a member of the EU, and continues to participate in its decision-making processes. For the UK to leave, the UK Prime Minister has to invoke Article 50 of the Treaty of Lisbon (the Treaty that forms the constitutional basis for the EU). The EU cannot ask the UK to leave. Once Article 50 is invoked, negotiations will then take place over the terms of the UK's exit from the EU and its relationship with the EU after the exit. Article 50 states that the negotiations have to be concluded within two years of the Article being invoked. Theoretically, this period of negotiations could be extended.
It may be some time before Article 50 is invoked. It is possible that extended discussions will take place before Article 50 is formally invoked. This means that the UK could remain a member of the EU until 2020 or later.
There is no doubt that Brexit has implications for the future of the EU, including the structure and political direction of the Union, as well as confidence in its economic aims. Other Member States may seek to renegotiate their terms of membership. The absence of the UK may have an impact upon how the EU develops and applies its policies.
Businesses and investors should closely monitor the negotiations between the UK and the EU from both sides. It is important to understand what each side is thinking.


BREXIT - Impact on Accounting & Audit Standards?

Commentary by David Chitty, International Audit & Accounting Director

Brexit, the impending departure of the United Kingdom (UK), from the European Union (EU), is the subject of extensive coverage and commentary. One subject to explore is the potential impact of Brexit on the setting of and support for international accounting and auditing standards.
This article assumes that the UK completely leaves the EU and has no involvement in the setting of policy for the single market. However, it should be noted that the UK's continuing engagement with the EU has yet to be decided and the degree of UK involvement could impact upon the issues raised in this article.
The EU has a record of supporting international accounting and auditing standards. Companies listed on markets in the EU have been required to report under IFRS since 2005. The 2014 Audit Regulation & Directive gives EU support to international auditing standards. As a major economic block the EU has become an important stakeholder in the standard setting process. EU adoption of IFRS for listed company reporting in 2005 was a breakthrough, enhancing the global credibility and adoption of IFRS.
The departure of the UK might result in a considerable change of perspective. The UK has the largest equity market in the EU and UK governments have consistently supported open market policies, including the adoption of standards issued by international bodies. In recent years, the European Commission, the administrative leadership of the Union, has developed policies that encourage equity as a source of business finance. Without UK influence, there might be a more protectionist approach and policies might be less favourable towards supporting equity. As a result, there might be less support for international standards that could be perceived as being "Anglo American" solutions to reporting.
Post-Brexit, there may be concerns that the EU, and nationals and institutions in the continuing EU have reduced influence over standard setting. Without the London capital markets, the EU's influence on market policies might appear to be diminished. Support for "pure" international accounting and auditing standards might decline and there might be a search for more regional solutions. In some EU member states, there is a strong tradition of tax reporting taking primacy over financial reporting. Tax reporting might once again take the lead, supported by the efficiency argument that it is better to have one national GAAP. The EU has processes for the approval of international accounting standards and is introducing a process for approving auditing standards. These processes might become more drawn out, delivering standards that are adapted for the EU markets. As a result, standards will be implemented later in the EU than in other countries, and could have regional differences.
Post-Brexit reporting and auditing in the EU might become more prescriptive. The 2010 Green Paper, the precursor for the Audit Regulation and Directive, was very prescriptive, seeking extensive legislative solutions to perceived market failings. The changes that resulted in the final Regulation and Directive are not solely the result of influence from UK sources, but in the future, the absence of direct UK influence might mean that a debate over similar policies take a different direction and have a different outcome.
A real concern arises from the potential loss of British expertise in standard setting and standard implementation. UK-based bodies and UK citizens have played, and continue to play, prominent roles in the standard-setting process. The International Accounting Standards Board is based in London and was the initial vision of a prominent British accountant. The UK Accounting Standards Board played a prominent role in the evolution of many of today's International Accounting Standards. UK stakeholders and accountants have contributed in many ways, whether directly in standard setting, commenting on proposals and standards, or playing leading roles in professional groups.
As a final thought, a full Brexit might lead to a change in the attitude of European institutions towards the international standard-setting agenda. Alternatively, full Brexit might lead to a more distinctive European perspective being given to the standard-setting debate, minus the long-standing, now separate UK voice. In time, we will know what the effect will be, but those with an interest in standard setting ought to speak out and present their vision for the EU's involvement with, and adoption of, international standards.


IESBA Standard - Noncompliance with Laws and Regulations

The International Ethics Standards Board for Accountants (IESBA) released a new standard Noncompliance with Laws and Regulations, also known as NOCLAR. NOCLAR defines a new framework to guide auditors, CFOs and other accounting professionals on what actions to take in the public interest when they witness or suspect illegal acts at their own organizations or within a client's organization. When laws and regulations appear to have been broken, the new standard explains when and how accountants should report wrongdoing to the authorities, without breaching their ethical duty of confidentiality.
IESBA sees the new standard as an opportunity for the global accounting profession to enhance its reputation as a safeguard for trustworthy business and a healthy global financial system. IESBA Chairman Dr. Stavros Thomadakis says, "The standard reinforces the public interest role that professional accountants play in stimulating more trustworthy and accountable organizations, and in helping to protect stakeholders and the general public from substantial harm that may stem from breaches of laws and regulations."
Businesses that employ professional accountants, subject to the NOCLAR standard, should consider the impact on procedures such as risk management, codes of personal conduct and whistleblowing.
The following resources are available:

The standard will be effective 15 July 2017, with early adoption permitted.



Audit Exemption Thresholds in Europe

FEE, the umbrella body for the accountancy profession in the Europe, recently published an information sheet Audit Exemption Thresholds in Europe following the implementation of the 2013 EC Accounting Directive. It covers audit exemption thresholds for the existing EU Member States, Norway, Iceland and Switzerland.
The information sheet shows that a new group of countries, including Germany and the United Kingdom, have significantly increased their thresholds for exempting small companies from statutory audit. 



Enhancing Audit Quality - the Future of Auditing Standards

The comment period for the IAASB's (International Audit & Assurance Standards Board) paper Enhancing Audit Quality, which includes proposals for revisions to Auditing Standards concerning quality control, professional scepticism, and the audit of groups, has closed.

  • A summary of the proposals can be found here.
  • Crowe Horwath International submitted a comment letter that can be found here.
  • Professor Arnold Schilder, Chair of the IAASB, recorded some thoughts about our comment letter. This recording can be found here.

Later this year, after having assessed the comment letters, IAASB will present its proposals for the revision of Auditing Standards and exposure drafts will start to be issued. Processes are also beginning for the revision of standards in other areas including the audit of estimates and the assessment of audit risk. The result will be the most significant changes to Auditing Standards in many years. The revised standards are likely to become effective around 2020. Businesses subject to audit should discuss with their auditors how the changes in Auditing Standards will impact upon the audit process.


New Audit Reports - Key Audit Matters

The IAASB's Auditor Reporting Implementation Working Group has issued a short overview Determining and Communicating Key Audit Matters to help with the application of the new audit reporting requirements.These requirements will apply to audit reports of listed companies.
The overview is intended to help determine which matters are Key Audit Matters (KAM) as set out in ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report, and what is communicated in respect of KAMs. Audit Committee Members and CFOs of listed companies will find the overview a helpful guide to the new requirements and how the issues arising from their audit will be presented in the audit report.


Technical Roundup

IASB issues narrow-scope amendments to IFRS 2, Share-based Payment

The International Accounting Standards Board (the Board) has issued amendments to IFRS 2 Share-based Payment, clarifying how to account for certain types of share-based payment transactions. Click here for further information about the amendments-Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2).

For additional recent technical developments, click here for the latest issue of Technical Roundup from Crowe Horwath International.

Contact Us
David Chitty - Audit
London, United Kingdom
+44 20.7842.7292

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