Emerging Issues Jim Gaa Member Emerging Issues and
Emerging Issues Jim Gaa, Member – Emerging Issues and Outreach Committee IESBA CAG Meeting New York, USA September 14, 2015 Page 1 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee • Activities since last CAG Discussion • Emerging Issues and Outreach Committee (EIOC): – Four teleconference meetings – Three in-person meetings • IESBA Staff met with IFAC Compliance Staff to consider how adoption is monitored for IFAC member bodies Page 2 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee • Presentations on status of adoption in G 20 / financial centers: – Presentations due to conclude at Nov/Dec 2015 Board meeting – Review of key differences as an indication of adoption issues – Move attention toward adoption in other jurisdictions • Outreach performed with IFIAR and INTOSAI Page 3 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee Recent International Developments • The Rise of Advisory Services in Audit Firms (Harris) • Initial Findings Regarding the Effects of Mandatory Audit Firm Rotation in Europe (PCAOB/Ferguson) • Current Trends in the Audit Industry (IFIAR) • AFM Report (Netherlands Authority for Financial Markets) • Toshiba Accounting Scandal Page 4 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee The Rise of Advisory Services in Audit Firms • Steven Harris speech: elaborates on investor concerns that were conveyed at the September 2014 CAG meeting • In US, largest accounting firms’ expanding lines of business activity and consequential investor concerns about the future direction of audit quality Page 5 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee Initial Findings Regarding the Effects of Mandatory Audit Firm Rotation in Europe • EU mandatory firm rotation primarily aimed at increasing competition and not for audit quality reasons • Push toward mandatory audit firm retendering and rotation is leading to lower audit fees in Europe, and triggering audit quality concerns Page 6 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee Initial Findings Regarding the Effects of Mandatory Audit Firm Rotation in Europe • Regulators are noticing some disturbing trends in Europe since approval of mandatory audit firm rotation – Audit fees seemed to drop between 20 and 40 percent in majority of European countries • New rules may be creating serious labor problems • In practice appeared to increase concentration not decrease it – Less competition Page 7 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee Current Trends in the Audit Industry • IFIAR meeting (Apr. 2015) considered audit quality issues • Considered how changes in the economic environment and in the market for audit services have affected the audit industry, notably: – Impact on audit quality of NAS and low growth in audit fees – Staffing – Changes in audit technology – Commoditization of the audit – Possibly need increased transparency of governance, structure & operations Page 8 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee AFM 2014 Report • Report summarizes results of inspections of quality of statutory audits conducted by Big 4 firms • Reviewed 10 statutory audits at each Big 4 firm. Classified 18 as “inadequate” Page 9 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee AFM 2014 Report • The most commonly occurring deficiencies concern: – Tests of controls – Substantive analytical procedures – Critical evaluation of the audit evidence obtained • Remedial measures were greater in number than measures taken in response to September 2010 report • Root causes for the deficiencies varied considerably Page 10 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee AFM 2014 Report • Request for firms to deepen analyses of root causes & reasons • Firms expected to – assess whether measures are effective and take different or additional measures if necessary. Make root cause analyses part of their quality control procedures – implement remedial measures while focusing on public interest Page 11 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee AFM 2014 Report • Give special attention and priority to the following matters: – Strengthening of governance – Creating a quality-oriented culture – Embedding statutory quality standards – Increasing transparency with respect to quality Page 12 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee AFM 2014 Report • AFM advised the legislature to make additions to the law: – Suitability tests to be conducted by the AFM – The AFM to submit findings and conclusions from suitability tests directly to the bodies responsible for governance – Mandatory implementation of corrective and improvement measures – Introduction of additional categories for PIEs • Mandatory supervisory boards Page 13 | Confidential and Proprietary Information
Emerging Issues and Outreach Committee Toshiba Accounting Scandal • Pre-tax profits overstated by US$2 billion over 7 years • Share price has decreased by 34% • Top executives set unrealistic targets and played a role in misreporting • Highlights importance of: – Pressure to breach Fundamental Principles – Financial reports prepared in accordance with Fundamental Principles – Effectiveness of recent changes in corporate governance Page 14 | Confidential and Proprietary Information
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