The Isle of Man Financial Services Authority The Chief Minister, States of Jersey

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1 November Report to: The Isle of Man Financial Services Authority The Chief Minister, States of Jersey Oversight of the Regulation of Auditors of Market Traded Companies

3 Oversight of the regulation of auditors of market traded companies Introduction 1. This document reports on the way in which the FRC exercised its delegated powers and responsibilities in relation to the auditors of market-traded companies (MTCs) in the period 1 April 2016 to 31 March A "market traded company" is a company incorporated in one of the Crown Dependencies (Guernsey, Isle of Man and Jersey) that has issued securities 1 admitted to trading on a regulated market 2 in the EU. 3. In formal terms this report meets: the obligation in Regulation 4 of the Public Oversight of Recognised Auditors Regulations 2010 (SD 08/10) to report annually in writing to the Isle of Man Financial Services Authority; and the obligation in Article 4 of the Companies (Designated Body) (Jersey) Order 2012 (the Designation Order ) to report annually to the Chief Minister and to provide a copy of the report to the Jersey Financial Services Commission. 4. There is no obligation on the FRC to report annually to the Committee for Economic Development of the States of Guernsey and to the Registrar of Companies of Guernsey. However, the FRC is sending copies of this Report to the Relevant Authorities in Guernsey, for information. Overview Auditors of MTCs in the Crown Dependencies should take note of the findings from the Monitoring of Audit Quality section of the FRC s Developments in Audit Report 2016/17 on Audit Quality Inspections, set out at paragraph 24 below, which reflect findings from our inspections of audits of both UK and Crown Dependency companies. We are not aware from our annual oversight visit to the ICAEW, of any reason to conclude that the ICAEW is not meeting its regulatory responsibilities effectively. 1 Two types of company are excluded from the definition of market traded company. The first is a company whose transferable securities admitted to trading on an EEA regulated market are debt instruments which have a minimum denomination of 100,000 (or equivalent) per unit. The minimum denomination figure is reduced to 50,000 if the securities were admitted to trading prior to 31 December The second is certain open-ended investment companies. 2 The UK Alternative Investment Market (AIM) is not a regulated market and companies listed on it and incorporated in a Crown Dependency are therefore not MTCs. Financial Reporting Council 1

4 Regulatory Responsibilities 5. Under the law of each Crown Dependency the key regulatory responsibilities are as follows: The Relevant Authority 3 in each Crown Dependency has overall responsibility for the administration of the statutory regime and specific responsibility for the registration of auditors of MTCs, termed recognised auditors. In appropriate circumstances, a Relevant Authority will exercise certain disciplinary powers in relation to recognised auditors. The Institute of Chartered Accountants in England and Wales (ICAEW) is responsible for maintaining and enforcing rules (i) as to the eligibility for appointment as a recognised auditor, and (ii) for the conduct of the relevant audit work. In appropriate circumstances, the ICAEW may discipline recognised auditors. The FRC has statutory powers and responsibilities delegated by each Crown Dependency: for exercising oversight over the regulation of recognised auditors by the ICAEW, and in particular notifying the Relevant Authority if it is not satisfied that the ICAEW is meeting its regulatory responsibilities effectively; and through its Audit Quality Review (AQR) team, for monitoring directly the performance of audits of major MTCs by recognised auditors. Background 6. Each Crown Dependency introduced a statutory regime for the regulation of recognised auditors in April 2010, following the introduction of EU requirements for the regulation of third country auditors, including auditors of Crown Dependency incorporated companies with securities admitted to trading on an EU regulated market. 7. The Crown Dependencies recognised that there was a well-established system of audit regulation in the United Kingdom and that it was likely to be effective and efficient to align the requirements in each Crown Dependency in respect of MTCs as closely as possible to the existing UK system of regulating audit. Each Crown Dependency delegated specific statutory responsibilities to the UK s Financial Reporting Council (FRC), as of April The European Commission declared that the system of regulating the audits of MTCs in Guernsey, the Isle of Man and Jersey is equivalent to that required within the EU The Isle of Man Financial Services Authority, the Jersey Financial Services Commission and the Registrar of Companies of Guernsey were declared competent authorities by the European Commission on 21 June 2016, when the European Commission adopted Decision (EU) 2016/1010 on the adequacy of the competent authorities of certain third countries and territories pursuant to Directive 2006/43/EC. 3 In Guernsey, the Committee for Economic Development of the States of Guernsey (previously the Commerce and Employment Department) and the Registrar of Companies of Guernsey; in Jersey, the Jersey Financial Services Commission, and in the Isle of Man, the Isle of Man Financial Services Authority. 4 Commission Decision 2013/288/EU of 13 June Annual Report to the Crown Dependencies 2017

5 9. This decision means that the European Commission considers that the regime of oversight of auditors of market traded companies in the Isle of Man, Jersey and Guernsey is considered equivalent in standard to that required by the EU of auditor oversight bodies in its Member States. 10. The framework for the relationship between the Relevant Authorities in the Crown Dependencies, the ICAEW and the FRC is set out in a Memorandum of Understanding, agreed in June There are at present 33 auditors recognised in one or more of the Crown Dependencies auditing a total of around 202 MTCs. Regulation of Recognised Auditors 12. The active on-site regulation of recognised auditors by the Relevant Authorities, the ICAEW and the FRC started in April We report below on the main aspects of the FRC s work in 2016/17. Inspections of Recognised Auditors 13. The Audit Quality Review (AQR) team of the FRC and the Quality Assurance Department (QAD) of the ICAEW have been conducting audit monitoring visits to the auditors of MTCs on behalf of the three Crown Dependencies since April We set out the basis on which this work is undertaken and in particular for the allocation of work between the FRC and the ICAEW. 15. The AQR team is responsible for inspections under each Crown Dependency s oversight regime where: the auditors are UK registered audit firms that are already subject to UK AQR inspection arrangements; other audit firms (UK audit registered or not) that have more than 10 MTC audits in aggregate across the three Crown Dependencies; the firm audits a MTC in the UK FTSE 350 (or the equivalent on another EEA regulated market); or a Crown Dependency authority or an EEA regulator has requested it. 16. The ICAEW s QAD undertakes the inspections under each Crown Dependency s requirements in all other cases. 17. The AQR and ICAEW inspections of Crown Dependency registered firms which undertake audits of MTCs are designed to: review the firm s systems and procedures; review a sample of audits selected to include audits related to each Crown Dependency where appropriate; meet at least a 3 year cycle, with the largest UK firms that also undertake audits of MTCs subject to annual inspections. Financial Reporting Council 3

6 Where appropriate this inspection is conducted as part of an existing audit inspection visit by either the AQR team or the ICAEW. 18. Under these arrangements the FRC is currently responsible for inspecting 11 5 firms undertaking some 179 audits of MTCs and the ICAEW is responsible for inspecting 22 firms undertaking some 23 audits of MTCs. 19. Following each inspection of a Crown Dependency audit firm a report is prepared and submitted to the Crown Dependencies Audit Registration Committee of the ICAEW. The Crown Dependencies Audit Registration Committee then makes a recommendation to the relevant Crown Dependency Authority as to the continuation, or otherwise, of the firm s registration, including where appropriate the imposition of conditions of registration. Inspections by the Audit Quality Review Team of the FRC in 2016/ Companies within the meaning of a market-traded company vary considerably. They include some large UK listed companies that are components of the FTSE 100 or 250 and have chosen to incorporate in one of the Crown Dependencies, and also smaller companies incorporated in the Crown Dependencies as specialist investment vehicles. 21. In general the audits of the FTSE 100 and 250 companies are undertaken by the London office of the UK firm of one of the major networks, acting as a recognised auditor registered in the particular Crown Dependency. These audits raise much the same issues as audits of large UK incorporated companies listed in London. Audits of other MTCs are more likely to be undertaken by audit firms established in the Crown Dependencies or through the local branch of a UK firm. Such audits present different risks to audit quality, particularly because the management and control of the MTC may be outside either the UK or the Crown Dependencies. 22. The AQR team undertakes an annual cycle of inspections of UK registered audit firms between April each year and the following March. In 2016/17 the work included file reviews of eleven audits of MTCs at six UK-based audit firms (Deloitte LLP, Ernst & Young LLP, PricewaterhouseCoopers LLP, KPMG LLP, BDO LLP and RSM UK Audit LLP), which are also subject to AQR inspection of their UK audit work and five further audits at PricewaterhouseCoopers CI LLP. 23. The fieldwork was completed during the year and the AQR team reported its findings to the Crown Dependencies Audit Registration Committee of the ICAEW and privately to each audit firm. The findings from our inspection of the audits of MTCs are incorporated within the Monitoring of Audit Quality section of the FRC s report entitled Developments in Audit 2016/17 and where appropriate in the individual public reports on UK audit firms. 5 Some firms are registered in more than one Crown Dependency. 4 Annual Report to the Crown Dependencies 2017

7 24. On page 55 of the Developments in Audit Report an analysis by category of findings is provided for all matters reported arising from the audits inspected in 2016/17. The equivalent analysis for the sixteen MTC audits inspected is as follows: Analysis of inspection findings Number of findings 2016/17 Number of findings 2015/16 Fair value and value in use measurements 8 6 Audit Committee communication 1 6 Independence and ethics 1 4 Group audits 1 2 Recoverability of tax and deferred tax 1 1 Revenue recognition 1 1 Inventory 1 - Substantive analytical procedures 1 - Audit finalisation 1 - Adequacy of financial statements and disclosures 2 - Audit report 1 - Adequacy of review and supervision 2 - Fraud procedures - 2 Total No matters were reported in respect of five audits in 2016/17 and two audits in 2015/ The file review audit quality categories for the sixteen audits of MTCs are as follows: Audit Quality Categories Number of Reviews Good (1) 2 (2) Limited improvements (2A) 10 (9) Improvements required (2B) 4 (2) Significant improvements required (3) - (-) The numbers in brackets relate to the thirteen audits reviewed in 2015/16. Financial Reporting Council 5

8 The distribution of audit quality categories is similar to that for all the individual audits inspected by the AQR team in the period. Oversight over the Regulation of Recognised Auditors by the ICAEW 26. The ICAEW is the body recognised in each Crown Dependency for maintaining and enforcing rules on those eligible for appointment as an auditor of MTCs, including monitoring the quality of audit work, and the investigation and disciplining of auditors 6. It is a part of the FRC s responsibilities to oversee the exercise of those functions, and in particular to satisfy itself that the ICAEW continues to meet the requirements for recognition. 27. The FRC s oversight of the ICAEW s regulation of recognised auditors is exercised in two ways: through the FRC s oversight, for UK purposes, of the ICAEW s role as a Recognised Supervisory Body for statutory auditors in the UK. Most of this work is equally relevant to the ICAEW s regulatory role in relation to recognised auditors, as the same regulatory systems apply in most respects. This work assesses whether the ICAEW has an effective regulatory system in place; and through specific oversight in relation to the ICAEW s regulation of recognised auditors: by including recognised auditors in samples, for example of quality assurance review files, selected for review; by reviewing specific regulatory arrangements that the ICAEW apply to recognised auditors. This work assesses whether the regulatory system is applied effectively to recognised auditors. Oversight over the Regulation of Recognised Auditors by the ICAEW in 2016/ The FRC carried out monitoring visits in 2016/17 to all the UK accountancy bodies recognised to regulate UK auditors, including the ICAEW. We reported on this work in the FRC's Annual Report and Accounts 2016/ Following the implementation in the UK of the EU s Audit Regulation and Directive (ARD) in June 2016 ultimate responsibility for statutory audit moved from Recognised Supervisory Bodies (RSBs) such as ICAEW under FRC oversight to the FRC itself as Competent Authority for statutory audit regulation in the UK. The RSBs now carry out their regulatory functions under legally binding agreements with the FRC. Accordingly, in 2016/17 our monitoring visit to ICAEW focused on a review of its policies, processes and procedures to ensure that its recognition continued to be appropriate. We also assessed how ICAEW had implemented the requirements in its delegation agreement in relation to the tasks of registration, audit monitoring, complaints and discipline and continuing professional development. 6 This is a similar role to that which it undertakes as a Recognised Supervisory Body in the UK. 6 Annual Report to the Crown Dependencies 2017

9 30. ICAEW has a team of inspectors who carry out monitoring visits to their audit registered firms including firms in the Crown Dependencies. The overall purpose of the visits is to ensure that audits comply with professional standards and meet the requirements of the UK Audit Regulations and the Crown Dependencies Audit Rules, as appropriate. 31. ICAEW use the same processes and documentation procedures for visits to both UK and Crown Dependency firms. From our review of ICAEW s policies, processes and procedures we had no concerns about how monitoring visits had been handled nor about how steps are taken by ICAEW to improve the quality of audit work of firms where remedial action is necessary. We consider that it is reasonable for us to conclude that these findings are equally applicable to both the UK and the Crown Dependencies. 32. We have no reason, based on our work, to conclude that any notification that the ICAEW is failing to meet its regulatory responsibilities effectively is necessary: (i) (ii) (iii) to the Jersey Financial Services Commission, under Article 4(4) of the Companies (Designated Body) (Jersey) Order 2012; to the Isle of Man Financial Services Authority, under regulation 7 of the Public Oversight of Recognised Auditors Regulations 2010 (SD 08/10); and to the Registrar of Companies of Guernsey under section 274M of the Companies (Guernsey) Law, Financial Reporting Council 2 November 2017 Financial Reporting Council 7

The accounts and audit rules applicable to Jersey companies

GUIDE The accounts and audit rules applicable to Jersey companies Last reviewed: January 2017 Contents Introduction 2 Requirement to prepare accounts 2 Entitlement to copies of accounts 2 Time limits for