International Executive Office Boulevard de la Woluwe 60, B-1200 Brussels Telephone: +32 2 778 01 30 Fax: +32 2 778 01 43 E-mail: bdoglobal@bdoglobal.com By email; European Commission, DG Internal Market and Services, Unit F4-Auditing, SPA 2/JII-01/112 B-1049 Brussels BELGIUM BY EMAIL TO; markt-consultation-isa@ec.europa.eu 15 th September 2009 Re: Consultation on the adoption of International Standards on Auditing Introduction BDO International is the fifth largest international audit network with over 600 offices in BDO Member Firms located across 110 countries. The network has been in existence since 1963 with many of the individual member firms in existence for many years prior to that. The network is coordinated by the BDO International Executive Office located in Brussels, Belgium. BDO International is not registered currently with the Commission Interest Representative Register, but is registered indirectly through being a constituent part of the European Contact Group, which is so registered (Register ID 0633841538-63). We do not object to having this submission made public on the Commission s website. BDO International is supportive of greater convergence across a range of areas that would facilitate the provision of audit services throughout the European Union. These areas include audit firm oversight, independence rules, liability regimes, audit firm ownership issues and adoption of International Standards on Auditing, as is the subject of this Consultation. BDO International generates 40%+ of its aggregate global turnover from Member Firms in the European Union/EEA. We believe that the adoption of International Standards on Auditing ( ISAs ) will improve the consistency of audit quality across the EU as well as easing some of the practical difficulties for audit firms who work on audit engagements with a pan-eu dimension. In addition, we believe that adoption of International Standards on Auditing as set by the International Auditing and Assurance Standards Board (IAASB) is essential to achieving consistent levels of audit quality across the European Union. Adopting ISAs would assure investors that audits are conducted in accordance with internationally accepted standards, and that all firms are applying the same rigorous standards when auditing financial statements anywhere in the European Union. Using a single set of auditing standards for audits conducted in all Member States of the European Union would enable users of financial statements to have a common understanding of the nature of audit work performed. As with International Financial Reporting Standards previously, in the area of accounting standards, the adoption of ISAs in the European Union would represent an enormous fillip for harmonised auditing standards and advance the Convergence Project materially. This is the project to converge financial reporting standards, auditing standards and professional ethics standards to single sets of high-quality standards across the world. BDO International is a world wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located.
General remarks As a founding and full member of the Forum of Firms, BDO has agreed to incorporate the Clarified ISAs and ISQC 1 into the audit methodology and quality control procedures for audits of financial statements with periods beginning on or after 15 th December 2009. We support the European Commission initiatives and consultation in relation to the adoption of ISAs throughout the European Union. We are pleased to submit comments on the European Commission s consultation document. We support the proposed EU adoption of the Clarified ISAs for statutory audits and encourage the Commission to implement such adoption as soon as practicable. We are fully supportive of a regulation as the appropriate legally binding instrument to be used by the Commission to adopt the ISAs for use in the EU, in order to ensure effective adoption of ISAs throughout the Union. We believe that ISAs meet the criteria set out in Article 26 of the 8 th (2006/43/EC) for adoption in the Union viz., Statutory Audit Directive a) have been developed with proper due process, public oversight and transparency, and are generally accepted internationally b) contribute a high level of credibility and quality to the annual or consolidated accounts in conformity with the principles set out in Article 2(3) of Directive 78/660/EEC and in Article 16(3) of Directive 83/349/EEC c) are conducive to the European public good The Commission has set out in detail the Governance and Due Process by which ISAs are developed and promulgated (by IAASB) and we support the conclusion that accordingly it may be justifiable to adopt ISAs in the European Union under this criterion. The ISAs are developed and issued by IAASB in an environment in which there is active involvement of public interest representatives, including audit regulators. There is a rigorous due process and we refer to the involvement of the IAASB Consultative Advisory Group (CAG) whose members offer a balance of geographical representation and of regulators, international organisations (including the Commission), users and preparers. Additional public oversight is offered by the Public Interest Oversight Board (PIOB) which is made up 10 members, including 2 members nominated by the European Commission. Question 1 Is international acceptance of the ISAs sufficiently demonstrated? International acceptance of the International Standards on Auditing (ISAs) as issued by the International Auditing and Assurance Standards Board (IAASB) is well demonstrated, as indicated in the consultation paper. As of mid-2009, more than 100 jurisdictions base their audit standards either on the ISAs directly or on domestic standards which are derived from the ISAs. More than 20 of the largest networks of audit firms (networks) have already agreed to incorporate the Clarified ISAs into their member firms audit methodologies and ISQC 1 into their member firms quality control policies and procedures as a result of their membership of the Forum of Firms. The Duisburg study 1 for the European Commission estimates that 56% of Member States currently have standards based on the ISAs or Clarified 1 Evaluation of the possible adoption of International Standards of Auditing (ISAs) in the EU http://ec.europa.eu/internal_market/auditing/docs/ias/study2009/summary_en.pdf). - 2 -
Public Authorities and Regulators in different jurisdictions have adopted ISAs and are involved in the due process. The consultation paper indicates that... Many public authorities, including audit regulators have adopted ISA or made public their decision to converge their standards towards the ISAs including Australia, Canada, China, the Netherlands, South Africa and the United Kingdom/Ireland FEE indicated in an informal May 2009 survey that 10 European Union/EEA Member States intend to adopt the Clarified ISAs for audits of financial statements for periods beginning on or after 15 December 2009. As referred to in the consultation paper, the World Federation of Exchanges (WFE) has already recognised the importance of the ISAs. On 11 June 2009, IOSCO publicly encouraged the acceptance of audits performed in accordance with Clarified ISAs for cross-border listings and the consideration of the Clarified ISAs when setting auditing standards for national purposes. Furthermore, the consultation paper rightly indicates that the Financial Stability Board (formerly Forum) has identified ISAs as one of the 12 Key Standards for Sound Financial Systems. At their meeting in London on April 2 nd 2009, the Leaders of the G20 expanded the Forum, broadened its mandate, re-established it with a stronger institutional basis as the Financial Stability Board and made reference to the above 12 Key Standards. In the United States, the Auditing Standards Board of the AICPA, which sets standards for unlisted companies in the United States, has indicated its intention to bring its standards (US GAAS) in line with ISAs as far as possible. Question 2 What degree of importance do you attach to the fact that the Commission may amend the standards? As the University of Duisberg-Essen study concluded, adoption of the clarified ISA through the European Union (EU) would contribute to the credibility and quality of financial statements and to audit quality in the EU, and to a greater acceptance of audit reports outside of their home jurisdictions within and outside of the EU. These effects would be diminished to the extent the Commission would modify Clarified ISAs after adoption. We support early and active involvement of the Commission and other European stakeholders, in the existing due process used to develop and modify ISAs, i.e. the standard setting process. This will ensure that the ISAs are being developed mindful of the criterion of being conducive to the European public good and being internationally acceptable etc. Proper engagement in the standard setting process and oversight of that process (including European Commission involvement at IAASB, CAG and PIOB level) should serve to avoid the need for any later amendments to ISAs. We note that the Commission services currently do not foresee the circumstances in which modifications of the contents of the clarified ISAs would be necessary (p.6). We cannot foresee circumstances under which the Commission, or the Member States, would seek to deviate from or amend Clarified ISAs. Whatever such circumstances might be, they should be a last resort contemplated only after the Commission has exhausted all other avenues of the standard setting process when seeking revision of a particular proposed standard or body of standards. We would recommend that the ISAs are adopted and endorsed en bloc and not on a standard by standard basis, to eliminate the possibility of deviations from the issued Clarified ISAs. - 3 -
Question 3 To what extent are add-ons or carve outs by Member States acceptable? In our view Member State add-ons and carve-outs are not desirable or acceptable as they run counter to the goal of harmonised international auditing standards which we believe would work to increase audit quality and enhance confidence in the reliability, comparability and consistency of financial statements across the European Union. Such deviations from ISAs would mean that users of the financial statements would need to be familiar with the differences in each Member State in order to make an informed decision about the quality of the audit. This would also impact on potential efficiencies that companies can expect to make by having their audit undertaken under one single set of auditing standards. We feel that carve outs would damage the brand of high quality audit and should therefore be prohibited. We fear that add-ons could lead to regulatory competition or arbitrage between Member States without any benefits for companies or the audit market as a whole. In addition, either form of departure from a given standard might lead to additional costs such as training, developing varying methodologies and the inability to freely interchange or second staff between audit firms in Member States. Question 4 Do you have any comments on the overall cost/benefit analysis presented in the University of Duisburg/Essen study? We welcome and endorse the overall conclusion of the Study that On balance, an adoption of the clarified ISAs through the EU would contribute to the credibility and quality of financial statements and to audit quality in the EC, and to a greater acceptance of audit reports outside of their home jurisdictions within and outside of the EU... In our view, the overall long-term benefit of the adoption of ISAs would be at the level of enhanced audit quality throughout the EU, which of course could not be measured by the Study. It may be that the oversight bodies making up the EGAOB could be in a position to corroborate this assertion over a period of time. The Study covered the costs by countries in aggregate, but did not take into consideration the costs that may occur if some Member States did not apply ISAs. These costs would include; a) The need to use different sets of standards within a given audit firm for statutory (local) purposes and for contributing to a group audit where the group audit is performed under the audit standards of another European Union Member State. b) Similar amendments to methodologies, audit manuals, training etc. c) Hidden costs incurred as a result of any confusion among stakeholders as to what an audit entails under different Member State regimes. We believe that if Clarified ISAs are adopted throughout the EU without any deviations, these costs would be avoided. Nonetheless they should be taken into consideration when examining the cost of adopting/not adopting ISAs. Question 5 Should the Application Material be part of the adoption process and acknowledged as "best practice"? Yes, the Application and Other Explanatory Material should be part of the adoption process. We believe that the application material is inseparable from the ISAs as it enables the requirements to be applied in a consistent manner. Where the application material is omitted, this could lead to different interpretations of some of the more high-level ISA requirements, by different Member States. The adoption method chosen should make it clear that although the Application Material is inseparable from the ISAs, it is guidance rather than a specific requirement or norm that has to be applied. The - 4 -
acknowledgement of the Application and Other Explanatory Material in the legal instrument that is used to adopt the Clarified ISAs, should maintain and explain or define its (the Material s) authority as stated in the ISAs. Paragraph A58 of ISA 200 on Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing explains that the entire text of an ISA is relevant to an understanding of the objectives stated in an ISA and the proper application of the requirements of an ISA. Paragraph A59 clarifies that where necessary, the Application and Other Explanatory Material provides further explanation of the requirements of an ISA and guidance for carrying them out. While such guidance does not in itself impose a requirement, it is relevant to the proper application of the requirements of an ISA. The Application and Other Explanatory Material may also provide background information on matters addressed in an ISA. Issuing official EU-Translations of the Application Material and providing those as appendices to the translated ISAs, may allow for a combination of ISAs and application materials without formally adopting the latter, if there were legal impediments to so doing. Question 6 Should ISQC1 on internal quality controls be part of the adoption process? Yes. We believe that it is difficult to contemplate adoption of the ISAs at EU level without the corresponding adoption of ISQC1. The Duisburg study noted that Member States currently have different ways of ensuring audit quality control ranging from having a set of quality control standards to leaving it to market forces and that this leads to differing results. If adoption of the ISAs is not supported by the adoption of a suitable and compatible quality control environment, we question whether users will feel comfortable with the assumption that the ISAs have been applied with the same rigour in each Member State As the consultation paper mentions, ISAs and ISQC 1 are interrelated, especially in that ISA 220 requires the engagement partner of an audit to assess compliance with the audit firm s internal system of quality control. The University of Duisburg-Essen study concluded that the introduction of ISQC 1 would increase the benefits of ISA adoption at EU level by enhancing the regulation effect of ISA adoption and that ISCQ1 would form the basis for the harmonisation of the methodology for inspections or external quality reviews of audit firms. Accordingly, we would encourage the Commission legal services to seek the optimum legal instrument to adopt ISQC 1 as part of the ISA adoption process. Question 7 In case of adoption of the ISAs at EU level, would a common reference to ISAs as adopted in the EU in all auditors' reports in the EU be sufficient? Or, is further harmonisation of audit reports necessary? Our view is that the reference in the audit report should be to compliance with ISAs and not to ISAs as adopted in the EU. If ISA adoption in the European Union results in a truly standardised approach to audits that is consistent with audits performed under Clarified ISAs, then the phrase ISAs as adopted in the EU is not required. In fact, we believe that this could be misleading as it implies that there have been carve outs or gold plating of the IAASB standards. This reference could also give the impression that there will necessarily be an EU variation whereas we believe that the objective should be to adopt ISAs, without EU carve-outs or add-ons. - 5 -
We consider that a harmonisation of audit reports is desirable and necessary. However, it may be more appropriate to have a separate consultation regarding the harmonisation of audit reports given the variations across Europe and between ISA 700 and the standards applying in some EU Member States. Question 8 Do you support adoption of ISAs at EU level? BDO International supports the adoption of ISAs at European Union level as we feel the benefits of adopting the ISAs at EU level far outweigh the costs. The use of a single high-quality set of audit standards across the European Union would increase confidence in the quality of auditing and boost confidence in financial reporting by companies located in the EU. We also feel that there are certain but unknown costs to not adopting ISAs at EU level and to continuing to permit a multiplicity of standards at national level. Question 9 If yes, which of the following options do you support: - Option 1 ISAs should be adopted for the audit of the consolidated accounts of the listed companies (IFRS accounts); - Option 2 ISAs should be adopted for the statutory audit of all companies except for the audits of small companies where Member States would be free to choose which audit standards should be applied; - Option 3 ISAs should be adopted for the statutory audit of all companies, including small companies for which an audit is required. We strongly support Option 3 requiring all statutory audits to be performed under the ISAs as we believe that this is the option that best advances consistent audit quality throughout the EU and so enhances confidence in the reliability of financial reporting. Option 1 and Option 2 will lead to more confusion and increased costs if audit firms are required to have two different sets of audit standards for different types of clients and conceivably result in greater disharmony than at present. This would surely result in confusion in the minds of users of financial statements as to the nature and level of assurance provided in any given circumstance and a consequent lowering of confidence in the reliability of financial reporting as well as auditing generally. The ISAs have been written in such a way that they can be adapted to audits of any size (scalability) and in particular the IAASB has taken into account the specific requirements of Small and Medium Entities. Furthermore, the specificities of audits of smaller companies are taken into consideration in the standards themselves and in related guidance. For example; a) ISAs contain Considerations Specific to Smaller Entities. b) FEE has estimated that in the simple audit of a small or medium-sized company, up to one-third of the 36 ISAs may not be relevant so their requirements would not need to be applied. c) The IAASB will be issuing guidance on the proportionate application of ISAs to audits of small and medium-sized entities. We would also postulate that options 1 or 2 could in time exacerbate concentration in the audit market through further tiering of audit firms (by reference to the audit standards they predominantly apply) and lead to a further reduction in real choice for companies seeking to appoint an auditor. Clearly these - 6 -
options would also have an impact on costs, as audit firms would be required to maintain two methodologies in each country with similar impact in the areas of training, publications etc. Additionally these two options would also militate against network-wide audit methodologies and personnel secondment/interchangeability. Auditor oversight bodies would have to inspect audit firms with the capability to assess quality under two sets of audit standards with obvious cost implications. We recognise however, that some audit firms, Member States and regulators may need significant help in order to ensure that the ISAs are applied in a proportionate manner according to the size and complexity of the underlying entity. Recent publications by the IAASB ( Applying ISAs Proportionately with the Size and Complexity of an Entity ) and the UK Auditing Practices Board ( Practice Note 26 in exposure draft) are helpful in this area. We observe that many Member States have not taken advantage of the provisions of the 4 th and 7 th EU Directives permitting exemption from statutory audit where certain thresholds are not exceeded. We believe that greater Member State use of these provisions offers the most effective way to minimise the administrative burden on micro-entities by relieving them of any mandatory requirement to have a statutory audit. This will allow individual Member States to tailor their exemption to the appropriate entities in its territory whilst at the same time maintaining the integrity of what an audit is. The IAASB is currently examining the possible development of international standards for a limited assurance service (as opposed to an audit ). This would be with a view to satisfying demand for such a service in those instances where a statutory audit is not required and such an audit is deemed to be too expensive compared to the needs of users in the particular circumstances. This would reinforce the distinction between an audit and alternative forms of assurance. Question 10 Do you have comments on the timing in case of an adoption of the ISAs? We would encourage the European Commission to adopt Clarified ISAs for all audits of financial statements in the EU for accounting periods beginning on or after 15 December 2009 which is the [IAASB] effective date for the implementation of Clarified ISAs; The European Commission should, as soon as possible after its analysis of the responses to this consultation paper, announce its timetable for the adoption and implementation by EU Member States of ISAs for audits of financial statements in the EU. We recognise that the timing of implementation may be impacted by the need to ensure proper training for auditors in the new standards. Nonetheless we agree with the Resolution of the European Parliament in March 2009 which identified the possible adverse effects on the regulatory environment of delay in implementation, resulting in further fragmentation, contrary to the objectives of the 8 th Statutory Audit Directive. Should the Commission so desire, we would be very pleased to clarify or expand upon any aspect of this submission by meeting with Commission officials or by further written submissions. Noel Clehane Global Head of Regulatory and Public Policy Affairs nclehane@bdoglobal.com - 7 -