3 December 2010 Our ref: ICAEW Rep 134/10 Steven Leonard, Project Director APB, 5 th Floor, Aldwych House 72-91 Aldwych London WC2B 4HN Dear Steven CONSULTATION DRAFT: SIR 2000 INVESTMENT REPORTING STANDARDS APPLICABLE TO PUBLIC REPORTING ENGAGEMENTS ON HISTORICAL FINANCIAL INFORMATION The ICAEW welcomes the opportunity to comment on the SIR 2000 consultation draft on published by APB in September 2010. The ICAEW operates under a Royal Charter, working in the public interest. Its regulation of its members, in particular its responsibilities in respect of auditors, is overseen by the Financial Reporting Council. As a world leading professional accountancy body, we provide leadership and practical support to over 134,000 members in more than 160 countries, working with governments, regulators and industry in order to ensure the highest standards are maintained. We are a founding member of the Global Accounting Alliance with over 775,000 members worldwide. We note that APB states in the introduction to its Invitation to Comment that it invites comments on all aspects of the proposed SIR. Under the Commenting on the Proposals heading, however, APB states that it is not inviting comments on other aspects of the SIR. We hope that going forward, APB will be clear in what it is seeking from respondents and we encourage APB to seek comment on all aspects of any consultation document, even where there is no intention to update it immediately. Respondents are rarely able or willing to confine themselves to a narrow range of changes. We comment below on the change noted in the Invitation to Comment and other APB changes, other main comments and substantive issues, and provide other detailed points. Several of the other substantive issues and detailed points relate to the Annexure which might be revised separately as a Bulletin perhaps. While we are not aware of any mischief being caused by the Annexure as it stands, we note below the greater needs of smaller firms in this context and the FRC s desire to improve competition and choice generally, both of which indicate the need for some consideration now of the future of this material. The overall extent of our comments below suggest that APB might wish to consider a more detailed revision of the entire standard, either now or later, and that in turn might include consideration of whether the clarity conventions should be applied. A revision now would call into question the proposed timing of the issue of the new standard, but we think in any case that a revised SIR issued by 15 December (paragraph 78) is an ambitious target. The Institute of Chartered Accountants in England and Wales T +44 (0)20 7920 8100 Chartered Accountants Hall F +44 (0)20 7920 0547 Moorgate Place London EC2R 6EA UK DX 877 London/City icaew.com
Please contact me should you wish to discuss any of the points raised in this response. Yours sincerely Katharine E Bagshaw FCA Manager, Auditing Standards ICAEW Audit and Assurance Faculty T + 44 (0)20 7920 8708 F + 44 (0)20 7920 8754 E: kbagshaw@icaew.com
INVITATION TO COMMENT - DISPENSING WITH THE APPENDIX THAT DETAILS REQUIREMENTS OF THE ISAS (UK AND IRELAND) THAT ARE UNLIKELY TO APPLY TO THE REPORTING ACCOUNTANT S EXERCISE and OTHER APB CHANGES 1. While we appreciate that ISA 200 makes it clear that there is no need to comply with non-relevant requirements in ISAs, and no need to document that non-compliance, we are not persuaded that the removal of Appendix 1 is in the best interests of audit quality. Appendix 1 may be particularly helpful to smaller firms with less experience in this area. The benefits of removing the Appendix should be weighed against the aim of being helpful to such firms in the interests of competition and choice. The Appendix helps all firms to the extent that it set out presumptions as to what is not relevant on grounds of being overridden by the SIR, or not predicated on an annual reappointment exercise. In practice, firms often document what they have not done and guidance from APB might be helpful in this context. We believe it important that firms are not prejudiced by the removal of helpful guidance. 2. Notwithstanding paragraph 1 above, we believe that the proposed changes to paragraph 39 stating that the auditor should comply with requirements unless they are not relevant, conditional, overridden by the SIR, or predicated on a recurring engagement, etc. are appropriate because the list of non-relevant requirements in the Appendix is not comprehensive. 3. Minor drafting changes to Appendix 2 attempt to reflect the complex relationship between the basis of preparation of the historical financial information and the accounting framework. Paragraph 74 reads as if there would always be a reference to a basis of preparation note. Footnote 8 in Appendix 2 reads as if there would either be a reference to the accounting framework or a basis of preparation note. The responsibilities section and the opinion itself in the body of appendix 2 refer to both the accounting framework and the basis of preparation note (which is the current default position). From time to time the financial information is not prepared fully in accordance with the requirements of a accounting framework in which case reference will be made to the basis of preparation only, as per paragraph 74. But paragraph 74 also needs to state that it is possible that information will be prepared in accordance with an accounting framework which is adequately described, but not in a basis of preparation note. In such cases, the report would to refer to the applicable accounting framework only. Paragraph 74, the responsibilities and opinion paragraphs in Appendix 2, and footnote 8 thereto, need to be aligned. OTHER MAIN COMMENTS and SUBSTANTIVE ISSUES, INCLUDING THE ANNEXURE 4. We believe that it would be helpful for the SIR to give an example of the type of impracticability to which paragraph 39 refers, such as the inability to perform a stock count as a result of being appointed too late, and contrast that with what is merely inconvenient. The documentation requirement for such departures is critical. It would also be helpful to have guidance distinguishing between situations in which the impracticability constitutes a limitation in audit scope such that a disclaimer of opinion will be inevitable, in which case the reporting accountant would normally decline the engagement, and situations in which the impracticability does not constitute such a limitation. 5. The first sentence of paragraph 39 should reflect ISA 500 and states that the reporting accountant should perform procedures...to enable the reporting accountant to draw reasonable conclusions there-from, rather than for the reporting accountant s purposes. The additions to paragraph 39 deal with paragraph 18 of ISA 200 and consideration might also be given to referring to paragraphs 19 and 20 to the effect that the reporting accountant is required to have an understanding of the entire text of an ISA, and shall not represent compliance with ISAs absent compliance with the requirements of all relevant ISAs.
6. Paragraph 66 states that representations may not be needed on matters already covered by representations obtained during the course of the audit. This may not be appropriate because: access is normally only obtained to the auditor s working papers after the signature of an appropriate hold harmless letter such representations are obtained for a different purpose (an audit), to support different procedures and for a different level of assessed materiality the representations are given by management for a different purpose and in a different context. 7. APB may wish to consider whether there should be a statement, similar to the AICPA Statement for s144 SAS 72 letters, in a footnote to paragraph 77, that it is inappropriate to refer to reporting accountants as experts in the context of any investment circular in which their report appears. The issue of consent is based on the principle applicable to an expert s report only and is not because the reporting accountant is an expert. CESR have confirmed that reporting accountants are not experts in this context. 8. The proposed SIR suffers from some of the problems of the old one to the extent that it does not flow. For example, the reference to defective accounts in paragraph 16 should come under paragraph 44 in the context of adjustments made to previous financial statements. Where these are non-gaap errors or restatements they could indicate defective accounts. The application of the clarity conventions might deal with some of these issues. 9. While the introduction to the SIR makes reference to both audited and reviewed interim financial information, it makes no reference to a public limited assurance report prepared for the purposes of an investment circular, which it should, given the title of the SIR. This may require substantial change but the omission is significant. 10. We are not convinced that the edit to paragraph 69 is correct. It states that a common record of audit documentation (vs working papers) is kept where joint reporting accountants are appointed. The extant words are probably more accurate; the change might imply that it is only the record of the reporting accountant s review of audit files that is maintained, rather than documentation of all of their work as reporting accountants. The sentence should be amended to read A common record of documentation, in accordance with paragraphs 46-48 of SIR 1000, is normally maintained. Annexure 11. It has been suggested that some of the conventions in the Annexure are somewhat dated. If the FRC wants more auditors to be able to work with listed companies, increasing competition and choice, it might be worth revisiting this area to assist smaller firms. It would be particularly helpful, for example, if the Annexure brought out the point that the UKLA insists that IFRS is adopted except where to do so conflicts with the Annexure (i.e. where the Annexure provides a choice, the choice must be that which complies with IFRS) the Annexure dealt with reverse takeovers where the Class 1 rules technically require financial information to be prepared on the basis of the legal acquirer s accounting polices, but the acquiree s accounting policies are actually used
there were some mention of the difficulties of calculating EPS when doing an aggregation and/or carve-out there were some mention of the Prospectus Directive complex financial history rule (Article 4a reproduced in FSA Prospectus Rule PR 2.3.1) the Annexure incorporated the guidance issued (on a limited basis) by the UKLA headed Financial Information in Prospectuses which Follows the Accounting Conventions Set Out in the Annexure to SIR 2000 reference were made to the guidance in the Frequently Asked Questions Regarding Prospectuses: Common Positions Agreed by CESR Members, issued by CESR. 12. Paragraph 12 should refer to modifications, not qualifications 13. We are not convinced that paragraph 20 still holds. Comment on exceptional and non-recurring items would be helpful, making it clear that highlighting exceptional and/or non-recurring items should not be different to the principles in the relevant accounting framework. 14. A new paragraph 24 might be useful stating that the past or proposed accounting for any past or recent changes in structure (including acquisitions and disposals) should first be reviewed by preparers, to determine whether the consolidated financial information provides sufficient information on the group that is the subject of the transaction, as required by the relevant regulations. The whole section could be renamed Complex Financial Histories, possibly with a reference to the CESR requirements to show a 75% holding or an acquisition of 25%. 15. Paragraph 49 should now reflect the revised IFRS 8. Existing management reporting may well already define segments, it simply has not been reported before and could state that segmental analysis for the carved-out business should reflect the presentation already, or to be, adopted by the entity for the purposes of the relevant accounting framework. Because segmental reporting often only applies to listed entities, an entity applying for admission to a market will be frequently be preparing such analyses for the first time. 16. Paragraph 54 is out of date and does not reflect accepted market practice. 17. We are not convinced that paragraph 62 still applies (if it ever did). It does not actually affect the accountant s report which does not say whether the information is extracted without material adjustment, or express an opinion on this. The paragraph should perhaps also refer to SIR 5000 for reconciliation tables. The main body of the SIR might state that it is not appropriate for the reporting accountant to determine what is material to the extraction. 18. The Annexure should cross-refer to the CESR principles covering application of the first time adoption rules.
OTHER DETAILED POINTS 19. Paragraph 9: it is always incumbent on reporting accountants to perform their own procedures, and the or in line 5 should be changed to which may include so that it reads The underlying requirement is that the reporting accountant will perform its own procedures which may include using the work of another auditor.. 20. Paragraph 11: it would be better to state that the reporting accountant may be able to use evidence previously obtained, rather than wish to do so. 21. The second sentence of paragraph 14 which refers to IFRS should alert reporting accountants to the fact that different markets have different rules and that the Prospectus Directive is not the only set of rules with which the company may have to comply, notwithstanding the use of the word may. This paragraph might be amended as follows:... In situations where the Issuer has a historical record of audited financial statements, the true and fair view for the purposes of the investment circular will be determined by the accounting framework prescribed by the rules of the relevant market to which admission is being sought and/or application of legislation such as the Prospectus Directive Regulation, where relevant. For example, a prospectus issued within the EU will require the may be a accounting framework such as International Financial Reporting Standards as adopted by the European Union, or one of the accounting frameworks accepted as equivalent. 22. The heading immediately prior to paragraph 16 should be amended to read, Pre-existing EU Compliant Financial Information. There are, increasingly, circumstances in which an Issuer already listed on a local exchange, is compliant with non-eu requirements, but not with the Prospectus Directive. To meet the requirements of the applicable rules may be correct for the pre-existing EU listing but not, say, where a further listing is sought in the UK. 23. Paragraphs 19 to 21 deal with Prospectus Rules and Listing Rules. As AIM is also relevant, the following paragraph might be inserted: Where information is presented in an AIM Admission document, the suitable criteria regarding its presentation are those set out in the AIM Rules for Issuers. 24. Under the heading of General Professional Considerations, reference should be made to paragraph 7 of ISA 210 on imposed limitations in scope which would result in a disclaimer and the need for the auditor to decline such engagements. In practice, reporting accountants are sometimes pressurised into accepting engagements where accounting records are incomplete and unreliable. This is partly because management of the Issuer is responsible for the historical financial information included within an investment circular, but neither the Issuer s management nor their advisors are always aware that it is the management of the Issuer to which reference is made in paragraph 6 of ISA 210, which refers to management s responsibility for the financial statements. This is regardless of who was the responsible party when the historical financial information was originally compiled, such as where the Issuer acquired, or is planning to acquire, a significant subsidiary immediately prior the issue of the investment circular. The following wording might be used: In accepting the engagement, the reporting accountant considers the preconditions for an audit set out in ISA (UK & Ireland) 210 Agreeing the Terms of Audit Engagements and the implications for accepting the engagement. In particular, attention is drawn to paragraph 7 which
states that if management or those charged with governance impose a limitation on the scope of the auditor's work in the terms of a proposed audit engagement such that the auditor believes that the limitation will result in a disclaimer of opinion on the financial statements, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so. 25. Paragraph 28: the first bullet should refer to emphasis of matter or other matters paragraphs, rather than and other matters paragraphs. In the third bullet, while the reference to a long form report is valid, it is not the best example. It would be normal for a reporting accountant to be requested to prepare a comfort letter in relation to the Issuer s directors working capital statement, which is likely to have a direct impact on the reporting accountants consideration of going concern issues. This would be a better example. An additional bullet might include a reference to assessing the need for an auditors expert. 26. The first sentence in paragraph 38 appears at least in part to be a requirement, and therefore to require bold type. 27. The reference to significant risks in paragraph 44 is redundant. 28. The second sentence of paragraph 51 does not go far enough, and should state that the reporting accountant should perform additional procedures in order to obtain sufficient appropriate evidence directly where the evidence obtained by the auditor is inadequate. 29. Items (a) and (b) within paragraph 52 are not mutually exclusive, and could be joined with the words which includes situations in which after (a). 30. Paragraph 55 the final reference to working papers should be changed to audit documentation. 31. Unless there was a change in auditor in the earliest year, which would have required tests on the opening balances, there will be a need to review a fourth file in relation to opening balances. This should be noted in paragraphs 54 to 57. 32. Some guidance on what the reporting accountant should do when representations are not received would be helpful in paragraph 68. Appendices 33. Appendix 1: this should make it clear that the engagement letter clause might equally apply to AIM, as well as prospectuses or Class 1 circulars. The example could refer to an admission document and as applied by the AIM Rules in square brackets. 34. The addition to the first paragraph of Appendix 2 should have square brackets around it; there may be no 26 week information, or it might not have been audited. 35. Appendix 2 makes no reference to the accounting periods covered which may be important where some of the information is neither audited nor reviewed.