Our ref: AASP/090915/SC0122 Mr Ulf Linder Acting Head of the Auditing Unit DG Internal Market and Services European Commission Rue de Spa 2 B 1000, Brussels Belgium By email: markt-consultation-isa@ec.europa.eu 15 September 2009 Dear Ulf Linder CONSULTATION ON THE ADOPTION OF INTERNATIONAL STANDARDS ON AUDITING (ISAs) Introduction 1. CIPFA, the Chartered Institute of Public Finance and Accountancy, is a professional body for accountants in public finance. While based in the United Kingdom we are the only member of the International Federation of Accountants which specialises in public sector issues. Our 14,000 members work throughout the public services, in national audit agencies, in major accountancy firms, and in other bodies where public money needs to be effectively and efficiently managed. Support for the EU adoption of ISAs 2. CIPFA supports the EU level adoption of clarified ISAs for all statutory audits. The standards have been developed in the public interest under rigorous and transparent due process. The consultation document notes the specific benefits that may be achieved for the European internal market in terms of improved audit quality, transparency and international convergence, which have been thrown into sharper focus by the financial crisis. We agree with this analysis. 3. In addition we would wish to point out that high standards are also vital for public sector audits. While some of the responsibilities of public sector auditors are drawn more widely than those of company auditors, the principles underlying the independent audit of financial statements are almost identical. The IAASB has for some time included public sector perspectives in ISAs to allow them to be applied to audits of public sector entities. Public sector applicability has been further enhanced during the Clarity Project, where the IAASB received input from the International Organisation of Supreme Audit Institutions (INTOSAI) which is an umbrella organisation for the government external audit community. Furthermore, CIPFA and other public sector stakeholders provided significant input through responses to IAASB exposure drafts, with a view to ensuring that the clarified ISAs provided proportionate, high quality guidance which can be applied to all economic sectors. While the standards to be
applied to public sector audits are generally determined having regard to jurisdiction specific factors, we consider that EU adoption of ISAs will make a persuasive case that the work of Supreme Audit Institutions and other auditors of government should be conducted under ISAs, or equivalent material with additional explanatory material on application to the public sector. Responses to Specific Questions 4. Further details about CIPFA and responses to the specific questions in the consultation document are provided in the attached annex. 5. I hope these provide helpful information which will assist the Commission in its implementation of improved standards in this important area. Kind regards Una Foy Assistant Director Professional Standards and Central Government CIPFA 3 Robert Street London WC2N 6RL t: 020 7543 5647 e:una.foy@cipfa.org.uk www.cipfa.org.uk
ANNEX RESPONDENT DETAILS CIPFA is responding to this consultation in its capacity as a representative of the audit profession. CIPFA is an organisation of accountants and auditors, and is a member body of the International Federation of Accountants (IFAC) Name of your organisation / company CIPFA. Country where your organisation / company is located: United Kingdom. Contact details incl. e-mail address: Chartered Institute of Public Finance and Accountancy (CIPFA) 3 Robert Street, London WC2N 6RL United Kingdom Una.Foy@cipfa.org.uk Short description of the general activity of your organisation / company: CIPFA, the Chartered Institute of Public Finance and Accountancy, is the professional body for people in public finance. Our 14,000 members work throughout the public services, in national audit agencies, in major accountancy firms, and in other bodies where public money needs to be effectively and efficiently managed. Is your organisation registered in the Interest Representative Register? NO Publication: Do you object to publication of the personal data on the grounds that such publication would harm your legitimate interests? NO
RESPONSES TO SPECIFIC QUESTIONS Question 1: Is international acceptance of ISAs sufficiently demonstrated? Yes, for the following reasons: The standards have been been accepted by more than 20 of the larger organisations in the IFAC Forum of Firms. In over 100 jurisdictions company audits are already based either directly on ISAs or on domestic standards derived from ISAs. These include some jurisdictions such as the United Kingdom where audits of companies and of public sector bodies are conducted using the same standards. The International Organisation of Supreme Audit Institutions has also contributed to the development of ISAs which can be applied to most public sector audits. While INTOSAI is not in a position to mandate adoption of standards by government auditors, it is using unamended IAASB standards as the basis for International Standards of Supreme Audit Institutions (ISSAIs) for financial audits. We would note that IAASB has developed the clarified ISAs through transparent and extensive consultation. The Clarity Project has benefited from the pro-active involvement and close scrutiny of a wide range of stakeholders from various economic sectors. In undertaking the Project, the IAASB has consulted with key representatives from regulators, business, investors and academics, as well as the audit community. We agree with the Commission s analysis regarding the robustness of the IAASB governance structure, and the appropriate representation of European Stakeholders in that structure.
Question 2: What degree of importance do you attach to the fact that the Commission may amend the standards? We agree with the Commission s analysis inasmuch we do not currently foresee any circumstances in which EU modifications of the contents of clarified ISAs would be necessary. It is crucial that clarified ISAs are adopted as issued by the IAASB. The objective of global auditing standards would be undermined if a Europeanised version is introduced which differs from the original standards; an EU precedent in this regard is likely to encourage other jurisdictions to also amend the standards. As noted earlier, clarified ISAs are the result of rigorous and inclusive due process with extensive involvement from EU stakeholders - consequently there should be no need for amending the standards for EU adoption. We are not aware of specific contentious issues from an EU perspective that would justify such amendments. We acknowledge that there might a need to introduce new requirements or update existing ones in response to future developments. It would be appropriate that the IAASB takes responsibility for undertaking any future revisions in consultation with international stakeholders.
Question 3: To what extent are add-ons or carve-outs by Member States acceptable? We would strongly advise against the introduction of add-ons or carve-outs by Member States. A lack of consistency in the introduction and implementation of the standards across the EU would undermine the benefits of common auditing standards. The Statutory Audit Directive under Article 26(3) contemplates the possibility of Member States imposing additional requirements or carve-outs only if these stem from specific national legal requirements. We suggest that such modifications should be applied only as a last resort in cases arising from specific national requirements. We recognise that auditors may need to be aware of specific requirements under national law that are not covered in the clarified ISAs. However, we would see this as additional explanatory material that informs the conduct of ISA audits in that jurisdiction. While these might be presented as add-ons to the standard or as separate standards on auditing, it is important that this material can be clearly distinguished from the IAASB text. More generally, we would note that regulators and other bodies which have responsibility for the implementation of standard setting may choose to produce additional explanatory material which, while not affecting the the requirements of the underlying ISAs will assist auditors in applying ISAs in particular circumstances. We see this as potentially very helpful, but again, this material should be distinguished from the ISAs, which remain the basis on which compliance with auditing standards should be judged. In this regard we would note the approaches developed by the UK Auditing Practices Board, and the INTOSAI Professional Standards Committee: The UK APB develops Practice Notes for particular economic sectors such as banking, insurance, public sector bodies and charities. These provide additional explanation of the legal and regulatory framework and inform the interpretation of standards requirements for the body of standards as a whole, but do not amend the standards. INTOSAI is developing International Standards of Supreme Audit Institutions (ISSAIs). Where these relate to matters covered by an ISA, the ISA text is quoted in full, preceded by a Practice Note which provides more explanation of public sector auditor environments and issues relevant to public sector audit clients which will inform the application of ISA requirements.
Question 4 : Do you have any comments on the overall cost/benefit analysis presented in the University of Duisburg/Essen Study? The overall conclusion of the study is in line with our understanding ie that an adoption of clarified ISAs throughout the 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. Having said this, we would note that, notwithstanding the validity of the research and the care taken in applying the methodologies, the study provides a broad estimate of outcomes. Accurate data on costs will only become available after implementation, and some of the qualitative benefits will remain difficult to assess with precision. Question 5 : Should the Application Material be part of the adoption process and acknowledged as best practice? We agree with the IAASB view that the application material is an inherent part of the standards. It should therefore be included in the adoption process to ensure ISAs are well understood and consistently applied. The benefits of ISA adoption will largely derive from improvements in audit quality and harmonisation in the internal market - these benefits could be unnecessarily compromised if this important element is carved-out of the standards. We are however not convinced that including the application material as best practice within the Regulation would provide an accurate representation of the status of the application material. We suggest that it would be preferable to include it as Application and Other Explanatory Material, which better conveys its role in helping auditors understand the ISA requirements.
Question 6: Should ISQC1 on internal quality controls be part of the adoption process? Yes. The ISAs were developed in tandem with ISQC1, which is a key part of the overall framework of standards issued by the IAASB Question 7: In case of adoption of 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? In our view a statement that the audit has been conducted in compliance with ISAs is sufficient. A reference to ISAs as adopted in the EU might give an impression that add-ons or carve-outs have been introduced at EU level, which we do not consider should be the case.
Question 8: Do you support adoption of ISAs at EU level? Yes 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 support Option 3. ISAs and the respective guidance have been developed to apply to all audits and the overall approach is tailored to the specific circumstances of the audited entity. We accept that the term audit is used in a number of different ways, which include for example internal audit in many organisations, and Value For Money audit carried out by many public sector auditors. However, in the specific area of the external or independent audit of financial statements we consider that it is important to have a single meaning of audit against which standards compliance should be judged. We accept that regulators may wish to develop (or indeed retain) alternative forms of assurance or other independent reporting on financial statements. However, in our view it best serves the interests of all readers of financial information if the different types of independent reporting are clearly distinguished, and this would be best achieved by using different terminology for work which is different to that conducted under ISAs.
Question 10 Do you have comments on the timing in case of an adoption of the ISAs? We consider that clarified ISAs should be adopted in the EU at the earliest opportunity. Ideally this should mean that the EU should adopt clarified ISAs for all audits for periods beginning on or after 15 December 2009, which is the IAASB effective date for the implementation of the standards. In particular we would advise against any form of staged or piecemeal adoption. The clarified ISAs are meant to be applied as a full suite of guidance, Piecemeal approaches are likely to be confusing to stakeholders and are likely to prolong rather than substantially ease transition to new standards.