Regulatory Impact Assessment in the Context of Independent
Regulation of Accounting and Auditing in the United Kingdom
Anna Samsonova and Stuart Turley
Accounting and Finance Group
Manchester Business School
University of Manchester
Booth Street West, Manchester M15 6PB
United Kingdom
Contact:
Anna.Samsonova@mbs.ac.uk (+44 (0)161 2750118) or
Stuart.Turley@mbs.ac.uk (+44 (0)161 2754015)
Draft: Please to note quote without permission
Regulatory Impact Assessment in the Context of Independent
Regulation of Accounting and Auditing in the United Kingdom
ABSTRACT
This paper studies the use of regulatory Impact Assessment, a policy instrument widely
promoted in connection with initiatives in many countries to develop more efficient
regulatory systems and “better regulation”, in the context of independent regulation of
corporate reporting in the United Kingdom. Our specific focus is on the manner in which
IA has been embedded in regulatory processes carried out by Financial Reporting
Council (FRC), the national policy-maker in the field of financial reporting and auditing.
Based on an analysis of IA statements published in connection with the development of
accounting and auditing standards and interviews with relevant staff, the study questions
the extent to which IA procedures are used as a real tool that shapes the regulatory
process and the contents of policies developed, or provides a formal justification of
policy decisions that are made separately, in order to comply with pressures for
legitimacy in the regulatory process. Our findings also highlight the difficulties with
implementing IA which stem from the principles-based nature of accounting and auditing
regulation and, consequently, challenge the advocacy of IA as a major tool for
determining regulatory policy in these areas internationally.
INTRODUCTION
Regulatory actors and institutions are subject to increasing public scrutiny in respect of
the content of their policies, the processes by which these policies are developed and the
reasoning behind them. Deregulatory initiatives by many governments in recent years,
calling for the burden of regulation to be reduced, have reinforced the need for regulators
to explain and justify their policy decisions (Mattli & Buhte, 2005). The instrument of
regulatory Impact Assessment (IA) has been presented as part of an agenda promoting
better and more efficient regulatory governance, initially in the U.S. and other OECD
member states and later among a wider range of countries (Kirkpatrick and Parker, 2004;
Radaelli, 2010).
IA is ‘a method of policy analysis, which is intended to assist policy-makers in the
design, implementation and monitoring of improvements to regulatory systems, by
providing a methodology for assessing the likely consequences of proposed regulation’
(Kirkpatrick and Parker, 2007p. 1). The underlying rationale behind IA is to encourage
policy-makers to consider whether the benefits of their regulatory proposals warrant the
potential costs borne by the recipients of regulation, while making sure that such
regulation serves the specified objectives.
2
Although IA has been studied in a number of regulatory contexts, it has not previously
been the focus for research in relation to the regulation of financial reporting. The
relevance of such research seems particularly pertinent now given the growing emphasis
on assessing the impact of the outputs of accounting and audit regulatory policy. In the
United States, for example, the governing precepts of the Securities and Exchange
Commission stress the importance of considering whether a ‘(regulatory) action is
necessary or appropriate in the public interest’ (Section 2 of the 1933 Securities Act),
while those of the Financial Accounting Standards Board (FASB) require that the new
accounting standards are issued ‘only when the expected benefits exceed the perceived
costs’ (FASB, 2012). Similar calls were made in relation to key individual pieces of
legislation, such as those related to the Public Company Accounting Oversight Board
(PCAOB), stressing the need to reappraise the costs and benefits of implementing Section
404 of the Sarbanes-Oxley Act of 2002 (PCAOB, 2005). These regulatory
pronouncements appear to resonate with those made by their counterparts in the United
Kingdom, which alongside the U.S. was among the first countries to introduce IA checks
for policy proposals with potentially significant impact on business. .
The aim with this paper is to critically appraise the contribution that IA can and does
make to the regulatory process in the field of corporate reporting through investigating its
use in the policy-making activities of the Financial Reporting Council (FRC), the
independent regulator for the accounting and auditing in the United Kingdom. Our
analysis provides an insight into the dynamics of regulatory processes in accountancy in
general, and also the policy-makers’ evolving understanding of the notion of good
regulatory governance.
The study draws on two sources of empirical material. Firstly, we have reviewed the use
of and reference to IA in policy documents prepared by the two Boards within FRC that
are responsible for policymaking in accounting and auditing, the Accounting Standards
Board (ASB) and Auditing Practices Board (APB) respectively, over a six year period.
Secondly, we interviewed staff who are directly involved in administering or conducting
the IA process either in the FRC in general or for the two both Boards specifically.
The remainder of the paper is structured as follows. The next section discusses the
background to IA as an instrument of policy-making, both internationally and in the
context of the UK, and its relevance to the regulatory role of FRC and identifies the
research questions motivating this study. This is followed by a section that discusses the
ways in which IA has been evaluated in previous research and outlines the development
of a framework within which the activities of the FRC boards can be evaluated. The
analysis of the evidence collected about the use of IA in connection with FRC regulation
of accounting and auditing is presented in the next section, before a final section which
contains a discussion of the findings and draws conclusions.
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IMPACT ASSESSMENT AND FINANCIAL REPORTING REGULATION
This section establishes the background for IA as a component of the process of
regulation for accounting and auditing in the UK and in doing so discusses the research
questions motivating the study. The discussion is presented in three stages. A general
introduction to the rise of impact assessment internationally as a tool of regulatory policy
making and its links to political agendas that emphasise the reduction of the burdens
imposed by regulation on business is followed by a description of the development of IA
within the United Kingdom. Finally, the application of IA in the context of the Financial
Reporting Council (FRC) which has responsibility for oversight of accounting and
auditing in the UK is presented and the research questions are introduced.
The regulatory imperative for impact assessment
As noted earlier, the role of IA may be viewed in the context of regulatory reform in
many countries and associated calls to reduce the burden of regulation. In that sense IA
has been of central relevance to the rhetoric and practice of regulatory reform and has
developed from an instrument mainly concerned with minimizing the cost of regulation
to become a more complex system of appraisal designed to enhance the quality of
regulation and foster public debate on policy issues (Kirkpatrick, 2007; Radaelli, 2004b).
Kirkpatrick and Parker (2007) provide a definition of modern IA as ‘a method of policy
analysis, which is intended to assist policy-makers in the design, implementation and
monitoring of improvements to regulatory systems, by providing a methodology for
assessing the likely consequences of proposed regulation and the actual consequences of
existing regulation’ (p. 1).
Although the cost of regulation remains one of the key concerns, the methodology of
modern IA now incorporates a wider range of analytical constructs, such as estimating
the benefits of regulation, relating the cost/benefit estimates to the expected impact of
regulation in order to identify and justify the preferred policy option, and encouraging
public debate to achieve more evidence-based policy making. The idea is that IA is not
simply a step prior to the publication of policy to justify the regulators’ decisions, but is
intended as a continuous open process which informs and facilitates the very process of
reaching these decisions. Some equate IA to an instrument of social learning where
policy makers as well as recipients ‘gain a clear sense of the options, and trade-offs, and
the consequences of solutions’ (Jacobs, 2007, p. 18).
The growth in the use of IA worldwide has been promoted by individual national
governments, starting from President Reagan’s executive order 12291, which required
assessing the costs and benefits of state regulation, and similar pronouncements by the
Thatcher government in Britain in the mid-1980s. Also significant has been the support
rendered by some influential international organizations. In 1995, for example, the need
for some form of regulatory analysis became part of the OECD Checklist for Regulatory
Decision-Making (OECD, 1995) which has since been adopted by many jurisdictions
around the world. Subsequently, the World Bank has actively advocated the use of IA in
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the framework of its development projects (see, for example, World Bank (2010)). As a
result, the practice of regulatory appraisal has been implemented, in one way or another,
by governments and national regulators in most OECD countries (OECD, 2002; Jacobs,
2006) and also, more recently, an increasing number of developing and transitional
economies (Kirkpatrick et al., 2004; Kirkpatrick and Parker, 2004; Jacobs, 2004; OECD,
2005).
The increasing role of IA may be explained from various perspectives. “Better
regulation” agendas and the quest for more effective regulatory management have made
IA attractive as a policy instrument (Radaelli, 2004a, 2004b, 2005; Majone, 2004). For
example, in the EU the spread of IA has been linked to the launch of the “Better
Regulation” initiative in 2000 and the publication a year later of the Mandelkern Group
report recommending that policy making ‘must address the whole life cycle of policy
(inception, design, legislation, implementation and review) across all fields of public
policy’ (Mandelkern Group on Better Regulation, 2001, p.i). Crucially, the report
suggested that the institutions of the EU and the Member States introduce forms of
regulatory impact assessment as ‘an effective tool for modern, evidence-based policy
making, providing a structured framework for handling policy problems’ (p.ii). Since
June 2002, the EU has operated a new approach to IA (European Commission, 2002).
There also appear to be alternative, more implicit rationales behind the spread of IA,
related to the increasing importance of regulatory accountability, transparency and
legitimacy. From the perspective of nation states and governments, IA represents a target
to emulate and is institutionalized as an internationally recognized policy tool to enhance
the country’s credibility in the eyes of stakeholders. In this respect, the diffusion of IA
may be seen as a result of isomorphic pressures for homogenization (Radaelli, 2005).
From the viewpoint of individual regulatory agencies and executives, employing IA
methodology is often motivated by a desire to enhance what Majone (1996) describes as
substantive and procedural legitimacy. In other words, IA is often relied upon as a means
to demonstrate and publicly validate the quality of regulation, and to create a public
perception that the regulatory practices and processes by which this regulation is
produced are appropriate, credible and justified. In this respect, the presence of public
consultation on policy issues in the process of IA makes more observable, accessible and
assessable the internal routines and processes of policymaking that are normally hidden
from the public eye. However, there is variation between regulatory contexts in the types
of actor networks that IA mobilizes. Radaelli (2004a), for example, points to the risks of
overemphasizing certain policy constituents, such as members of the business
community, over others, such as the general public. Such an approach can create
imbalances in the representational mechanisms of policymaking and also undermine the
procedural legitimacy of regulation by contributing to the perception that regulators use
IA to project a certain ‘desired’ image and justify predetermined policy decisions. This
possibility has been highlighted in recent empirical investigations. Torriti (2007), for
example, points to the risk if IA becoming ‘a routine tool rather than to a proper decisionmaking tool’ (p. 254) and consultation procedures being exploited primarily as a means
to ‘improve the reputation of EU regulation through stakeholder involvement’ (p. 255).
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As well as its role as a vehicle for external legitimacy, the use of IA may also be
explained with reference to its potential contribution to the inner dynamics and internal
processes of regulatory agencies. Radaelli (2010), for example, argues that the spread of
IA signals a meta-regulatory trend toward greater monitoring of rule-making and more
extensive administrative control by the political principal (such as government or highlevel national regulators) of the activities of the agents of regulation (executive regulatory
agencies and departments). Specifically, he argues that IA can enable the principal to
react early enough to prevent agents deviating from the main direction of regulatory
policy. The agents may also find IA helpful in reassuring the principal before the exact
outcome of policymaking is formulated that the broad political objectives are observed.
This latter role gains particular significance in the context of independent nongovernment regulation, as the absence of a clear principal-agent relationship may shift
the meaning of accountability toward the interests of specific stakeholder interests.
Independent regulators are increasingly delegated roles traditionally performed by the
state (such as standard setting and enforcement). However, as non-elected (through an
open democratic process) organizations, they do not have the same external legitimacy as
state institutions. In this vein, Maggetti (2010) argues that a transfer of policy making
authority from the state (the political principal) to independent regulators (agents) does
not automatically lead to a similar transfer of legitimacy. To compensate for what he calls
a ‘net loss of legitimacy’, independent regulators look for other sources of legitimization
which would demonstrate that (a) ‘they are more proficient in producing qualitatively
better policy outputs than democratic institutions’ and (b) ‘they operate more lawfully,
transparently, openly, and fairly than ordinary bureaucracies can do’ (p. 3). It can be
argued that IA provides one tool to tackle the democratic deficit facing independent
regulators by displaying the procedural substance of their regulatory processes.
The development of regulatory impact assessment in the United Kingdom
The British approach to IA has been considered in the ‘avant-garde of impact
assessment’ (Renda, 2006, p. 3). The beginnings of IA date as far back as 1985 when the
Thatcher government launched its deregulation initiative to reduce the administrative
burden of regulation (so called “red tape”) on industry and commerce. A White Paper
‘Lifting the Burden’ (HMSO, 1985) was issued arguing that departments within central
and local administrations should scrutinize the outputs of their policy making, and a
government agency, the Enterprise and Deregulation Unit, was formed within the
Department of Trade and Industry (DTI). The Unit promoted a ‘Compliance Cost
Assessment’ (CCA) initiative which prescribed that relevant government agencies
systematically evaluate the cost of compliance with legislation borne by businesses.
Subsequently the approach to IA expanded from the original focus on cost to include risk
assessment and additional reporting and monitoring requirements. In 1992, the
government gave further impetus to the deregulation agenda by establishing seven task
forces within DTI, including one for Deregulation, and deregulatory initiatives such as
“think small first”, which emphasized the interests of small businesses. The objectives of
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CCA were broadened to include the appraisal of the overall impact of proposed
legislation as well as the quantification of benefits (DTI, 1994, p.3).
In 1998 a new model, which effectively became the first prototype of modern IA, was
outlined in ‘The Regulatory Appraisal Guide’ (Cabinet Office, 1998). This model can be
considered as the first formal guidance on IA in the UK. Inter alia, the new rules
encouraged more detailed analysis of policy alternatives, including the so-called zerooption (leaving the existing regulation unchanged). A revised version of the guidance
published two years later (Cabinet Office, 2000) made it a formal requirement that IA
reports accompany new government regulations which potentially have a significant
impact on business, charities, and voluntary and public sectors.
More recently, the growing significance of IA practices has been acknowledged as a vital
part of a wider debate on effective regulatory governance. In March 2005, a review led
by Sr. Philip Hampton, i.e. the Hampton review (HSMO, 2005), which has become one
of the cornerstones of the government’s better regulation agenda, examined existing
regulatory practices within government and outlined a number of recommendations. The
Review emphasized the importance of achieving regulatory outcomes in a way that
minimizes the burden imposed on businesses. Key to achieving this was deemed the
assessment of risks during policy formulation and implementation, greater regulatory
accountability, and better justification of policy decisions, where the need for regulatory
action is weighed against the total administrative burden, from form-filling to penalty
regimes. The Hampton Review led to the Better Regulation Action Plan in June 2005
(HM Treasury, 2005) and at the launch of the Plan the then Chancellor Gordon Brown
noted:
The new model we propose is quite different […] there is no inspection
without justification, no form filling without justification, and no information
requirements without justification. Not just a light touch but a limited touch.
Instead of routine regulation attempting to cover all, we adopt a risk based
approach which targets only the necessary few1.
A key outcome of the Action Plan was the Legislative and Regulatory Reform Act in
2006 which introduced some important changes to the implementation of the
government’s better regulation agenda. Particularly, in line with the Hampton review, the
Act required that the activities of the regulators (irrespective of whether they are
government or independent) comply with the principles of good regulation in that they
‘(a) should be carried out in a way which is transparent, accountable, proportionate and
consistent and (b) should be targeted only at cases in which action is needed’ (Art. 19).
A further result from the Hampton review was the establishment of the Better Regulation
Executive (BRE) within the government’s Department for Business, Innovation and
Skills (BIS). BRE carries out the so called Hampton implementation reviews as a way to
establish and demonstrate that national regulators (both governmental and nonSee ‘Chancellor launches Better Regulation Action Plan’, Government News, 24 th May 2005,
http://www.gov-news.org/gov/uk/news/chancellor_launches_better_regulation_action/18681.html
1
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governmental) comply with the principles of good regulatory governance. Interestingly,
the FRC has been one of the non-governmental regulators examined (see later).
The UK parliament has been described as having ‘an appetite for scrutiny of regulatory
reform’ (Radaelli, 2010, p. 99), evident in a number of initiatives associated with better
regulation objectives. A report by the House of Lords’ Select Committee (House of
Lords, 2007) stated that regulators ‘should commit to evaluating the impact of their work
and monitoring the extent to which they are providing value for money’ (p. 36). A further
distinctive feature of IA practice in Britain is that the National Audit Office (NAO) has
reviewed annually a sample of regulatory impact analyses produced by government
agencies as part of its key task of overseeing public spending on behalf of Parliament
(Humpherson, 2007). Over time, the NAO reports have provided evidence of and
commented on a number of significant general issues which are relevant to our analysis
of the contribution of IA in the regulation of accounting and auditing.
In its early reports (NAO, 2001 and 2004), the NAO expressed serious concerns about
the methodological weaknesses and a lack of experience in conducting high-quality
regulatory analysis. Noting a gradual increase in the reliance on public consultation and
inclusion of a wider range of policy stakeholders, the NAO argued that more extensive
and longer consultation did not always lead to a good quality IA (NAO, 2004, p.6). In
some of its later reports focusing on the conceptual and cultural aspects of IA practice
(NAO, 2005, 2006, 2007, 2010), the NAO pointed out that IA exercises were often
produced to justify decisions that had already been made and were ‘only occasionally
used to challenge the need for regulation and influence policy decisions’ (NAO, 2006,
p.3). It was even noted that, although IA was becoming increasingly embedded in the
processes of policy making, too many government policy staff still ‘did not find the
Impact Assessment useful in developing policy’ (NAO, 2010, p. 35). Similar concerns
have been voiced in academic research (Jacobs, 2005; Radaelli, 2010), pointing to a
common perception within British regulatory circles that the requirement for IA has been
‘pushed down from the top political level, with little use of local innovation and
experimentation’ (Radaelli, 2010, p. 98). With the annual cost of IA to the British
government reaching £13bn in 2008-09 (NAO, 2010, p. 4), these findings seem
particularly significant in the context of continuing calls for better and more costeffective regulation voiced during the current financial crisis (Dudman, 2010).
Impact assessment and the regulatory role of the Financial Reporting Council
The Financial Reporting Council acts as an independent regulator of corporate reporting
and governance in the UK. First established in 1990 as part of a major reform of the
process for setting and overseeing compliance with accounting standards, its role was
changed significantly in 2004 as a result of government reviews of accounting and
auditing following the major corporate scandals of the early twenty first century, which
had a negative impact on confidence in those functions (Turley, 2008). Importantly for
the purposes of this paper, the responsibilities of the FRC were expanded to incorporate
auditing as well as accounting. In its own publications, the FRC describes its role as
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follows: “The Financial Reporting Council is the UK’s independent regulator responsible
for promoting confidence in corporate reporting and governance” (FRC, 2009)2.
As an ’independent’ regulator, the FRC is separate from the accounting profession, which
historically had authority over standard setting in both accounting (to 1990) and auditing
(to 2004), but also is not formally part of government. Rather the FRC operates with a set
of powers and responsibilities which include some statutory or quasi statutory roles that
are devolved by government. The Accounting Standards Board (ASB), one of the
constituent boards under the FRC umbrella, is the prescribed body for issuing accounting
standards as referred to in the Companies Act 2006 (Section 464). The Companies Act
also includes provisions requiring ’appropriate independent arrangements’” for regulation
and supervision of auditing and other FRC boards, the Auditing Practices Board (APB)
and the Professional Oversight Board (POB), have delegated authority from the Secretary
of State for these purposes (Section 1228 and Schedule 10, paragraphs 9, 10 and 22).
The component parts of FRC therefore exercise on behalf of government significant
authority and responsibility in respect of financial accounting and auditing in the UK. As
such, they are expected to meet government norms in respect of the regulatory approach
followed and satisfying the demands for regulatory impact assessment is one aspect of
these expectations. Following the major reform of 2004 and the associated expansion in
its responsibilities, the FRC published its Regulatory Strategy (FRC, 2004) and this has
been updated a number of times in subsequent years. The current version of the strategy
(Version 4, FRC, 2009) includes the following statements that are relevant to the role of
IA in the FRC regulatory approach:
’We are committed to the Better Regulation Executive principles of good regulation.
These are that regulation should be: …
 Accountable: Regulators must be able to justify decisions, and be subject to
public scrutiny.’
’In applying these principles to our work, we aim to […].
 Target the use of our power, taking a proactive, risk based and proportionate
approach, making effective use of impact assessments and having particular
regard to the impact of regulation on small enterprises.’ (FRC, 2009, pp.4-5)
The approach to IA is further explained on the FRC website as follows:
’The FRC follows three guiding principles in producing impact assessments:


The work that goes into the production of an impact assessment should be
proportionate to the importance of the proposal that it covers.
Where a standard is being introduced as a direct response to legislation or
regulation, or as part of an agreed policy commitment to adopt international
2
The full scope of FRC activities is reflected in several operating boards; The Accounting Standards
Board, the Auditing Practices Board, the Board for Actuarial Standards, the Professional Oversight Board,
the Financial Reporting Review Panel and the Accountancy and Actuarial Discipline Board.
9

standards of accounting or auditing, the impact assessment should explain the
rationale for introducing the standard and should focus on any aspects of the
proposed standard which augment the relevant legislation or augment or diverge
from the relevant international standard.
Where appropriate, we are particularly alert to the impact of proposals on small
businesses.’3
The work of the FRC in regulating financial reporting and auditing in the UK therefore
includes both an expectation that IA will form part of its processes, due to the statutory
and quasi-statutory nature of some of its activities, and an explicit commitment to the use
of IA within the FRC’s own policy statements. The manner in which this commitment is
followed through in practice and the contribution IA makes to the development of
financial reporting regulation is the subject of this paper. As noted earlier, the FRC has
been subject to review from the government’s own agency on implementation of its
regulatory principles. That review (BRE, 2010a) provides a positive assessment of the
FRC’s governance practices as demonstrating ‘a very high level of compliance with
Hampton criteria’ and ‘a positive approach to better regulation’ (p. 3). Specifically, the
procedures for public consultation were found to be particularly strong, involving a wide
range of policy stakeholders with strong input from practitioners. The report, however,
warned of the dangers of ‘consultation overload’ and suggested FRC should set clearer
priorities on the volume and content of consultation (p. 12). The review also found that
the FRC needed to develop a more comprehensive approach to the analysis of the costs
and benefits of its proposals, and to monitor better the accuracy of forecasted estimates.
Research questions
Against the background of the development of IA as a component of general regulatory
reform discussed above and also the context of the need for its application in the work of
the FRC as a corporate reporting regulator, the underlying objective of this study is to
investigate the manner and extent of the contribution that IA can and does make to the
regulation of accounting and auditing. The earlier discussion pointed to issues and
problems that have been identified by commentators reviewing the role of IA. For
example, it has been noted in other contexts that IA may be used simply as an additional
tool by which policy makers justify decisions already taken, or may be undertaken as
compliance exercise rather than being used as a major factor in the process of arriving at
policy choice. The difficulties of implementing a rigorous appraisal of costs and benefits
in some policy areas have also been identified. In this light, the overall objective of
examining the contribution of IA in policy making for corporate reporting gives rise to
the following more specific research questions:
1. To what extent is there evidence that IA has influenced the regulatory outcomes
resulting from the work of FRC, has been used as a legitimating tool by policymakers or has been approached primarily as a compliance exercise?
3
See http://www.frc.org.uk/about/assessment.cfm.
10
2. What does the content of IA published by FRC indicate regarding the quality of
approach adopted in comparison with expectations for the conduct of IA?
3. What implementation issues and difficulties are evident from the use of IA by FRC
that are relevant to understanding the potential contribution of IA to policy making
for accounting and auditing more generally and internationally?
FRAMEWORK FOR EVALUATING IMPACT ASSESSMENT
The quality of IA can be appraised in various ways. For example, one approach focuses
on the processes by which IA is carried out, such as the consultation procedures, the
choice of techniques used and the final decision-making. This approach requires close
access to the arena where the regulation takes place, which is usually difficult to obtain.
A second approach involves assessing whether IA serves its objective of making a
tangible impact on the regulatory process and its outcomes, that is would regulatory
outcomes have been different in the absence of IA. Here the difficulty is the extent to
which particular regulatory action can be attributed directly to the presence of IA.
Finally, the quality of IA can be appraised by analysing the content of the completed IA
reports. Given the relative ease of access to such data, it is not surprising that this method
has been widely used in prior research. The principal evidence used in this study is the
published documents containing or referring to IA associated with a series of regulatory
episodes within the FRC, together with interviews with FRC staff. The framework used
for analysing the FRC’s use of IA is introduced later in this section, but first some
background is provided on evaluations of IA in the literature more generally.
Evaluations of impact assessment
A significant number of studies have analysed the contents of IA reports against a set of
principles of best practice, using a scorecard where a score is awarded when a specific
quality criterion is met, such as the inclusion of estimated costs and benefits or the use of
public consultation. Much of this literature has taken a negative view of the
comprehensiveness and robustness of IA exercises and has reported significant
shortcomings (Ambler et al., 2003; Harrington and Morgenstern 2004; Hahn and Dudley
2007; Renda 2006; Cecot et al., 2008). The pioneer of the scorecard method, Robert
Hahn, has conducted a number of studies to appraise the general standard of IA in various
federal agencies in the U.S. (e.g., Hahn, 2000; Hahn and Dudley, 2007). These studies
report a downward trend in quality as the volume of IA increased as well as considerable
variation in quality both within and between agencies. Hahn and Dudley (2007), for
example, comment that low scores for IA conducted by the Environmental Protection
Agency may indicate that “the approach of political institutions toward the regulatory
policy process has not changed much” (p.16) and point to limited support from the
political establishment.
Many studies of regulatory practices in European institutions provide an essentially
similar assessment of the state of IA practice (Vibert, 2004; Radaelli, 2004; Renda, 2006;
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Lee and Kirkpatrick, 2006; Cecot et al., 2008). Lee and Kirkpatrick (2006) examined the
first set of the extended impact analyses that started in 2003 in the Directorates of the EU.
They report methodological weaknesses and inconsistencies, specifically with regards to
problem identification, insufficient consideration of the policy alternatives, and
incomplete estimation of costs and benefits. An investigation by Renda (2006) looking
into a larger sample of extended IAs found that the problems identified by Lee and
Kirkpatrick remained largely unsolved (p. 58). Over half of the reports failed to quantify
the costs of implementing a policy proposal, and even fewer reports were found to
monetise the benefits. However, some more recent studies (Cecot et al. 2008) report a
slow improvement of the standard of IA, especially with respect to the assessment of the
impact of costly regulatory proposals.
Much of the literature employing a scorecard methodology provides a strongly economic
and somewhat normative view of what is perceived as IA quality. It does not, however,
adequately address a wide range of other, perhaps more implicit, influences on IA
quality. Specifically, it provides a poor indication of the extent to which a particular
assessment criterion is satisfied and of the relative degrees of quality (Hanh & Dudley
2007; Cecot et al., 2008). More importantly, it does not explain how the context of
regulation may affect the IA and how internal politics and institutional constraints may
determine how regulators interpret and internalize IA in their policymaking processes.
Furthermore, the functionality of IA appears to be dependent on the cultural,
organizational, and institutional settings in which it is applied (Radaelli, 2005; Torriti,
2007). Radaelli (2005, p. 271), for example, argues that the quality of IA has multiple
dimensions which ‘is compounded by the fact that context has shaped the diffusion’ of
IA. The nature of IA is likely to vary between countries, and between types of regulatory
institution (e.g. government or independent regulator). These differences, in turn, are
likely to determine perceptions of what constitutes a good IA and how IA quality is
constructed. Hence, in order to explore these contextualized dynamics and attitudes that
shape IA practices, there is an important role for research which focuses on IA within and
institutional setting and which takes an integrated approach to the analysis, including
analysis of IA reports as well as interview accounts by those administering IA.
Analytical framework applied to FRC
Given the preceding comments about institutional context, for the purposes of this study
it is important to acknowledge the general regulatory framework and related requirements
prescribing the content, format and function of IA. In the UK the current IA Guidance
and Toolkit, which outlines government policy on the scope and process of IA (BIS,
2011a, 2011b) essentially copy the relevant EU pronouncements. They characterize IA
as a continuous process of appraising the ways of achieving a regulatory objective and its
consequences, and also as a tool for the policy makers ‘to assess the likely costs and
benefits (monetised as far as possible) and the associated risks of a [policy] proposal’
(BIS, 2011a, p. 4). The Guidance requires that IA accompany any proposal, originating
from either a domestic or international source, that may have an impact on public, private
or civil society organisations. The rule applies to mandatory and voluntary proposals
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produced by a government department or a self-regulating institution. IA is seen as an
integral part of the process of regulatory decision making and as a means to encourage
policy makers to consider the potential consequences of proposed regulation in the early
stages of their processes. This involves identifying the need for regulation, the
stakeholder groups that are likely to be affected, available policy options, and the best
alternative that achieves regulatory objectives while minimizing the costs and burdens.
The IA Toolkit (BIS, 2011b) outlines seven steps by which the above is to be
accomplished, namely:
Step 1: Identifying the problem. The policy makers should provide a rationale for
regulatory intervention by identifying the nature of the policy problem in question, its
scope and those best placed to resolve it.
Step 2: Identifying desired policy objectives. The policy objectives need to be clearly
articulated, correspond to the principles of good regulation4, and be considered
achievable.
Step 3: Identifying viable policy options the will achieve the objectives. The policy
makers should identify and rationalize a variety of alternative solutions (including nonregulatory) for achieving the stated policy objective. The extent of analysis may vary
depending on the stage of policy development. The identification of policy alternatives
(including a ‘zero’, or ‘do nothing’, option) should take place during the initial stages of
the process; and the final stages should produce a decision on the preferred option
together with an explanation of how this decision has been reached. In this respect, the
IA Toolkit states that ‘it is important to demonstrate that the analysis has not jumped to
conclusions’ (BIS, 2001b, p. 14).
Step 4: Identifying the impacts. Once the policy alternatives have been identified, the next
step is to identify their relative impacts, both negative and positive, such as economic and
financial impacts on industry, market or economy in general as well as on individual
stakeholders. The Toolkit points to the importance of considering impact on competition
and whether the regulatory proposal is likely to lead to changes in the number or range of
suppliers, and limit market competition.
Step 5: Valuing the costs and benefits and selecting the preferred option. The costs and
benefits of the policy proposals should be monetized as comprehensively as possible,
including, for example, transitional (one-off) and recurring costs and benefits as well as
direct (first order effects) and indirect (second order effects). Monetization is intended as
a primary means for the policy makers to assess and compare available choices and to
inform their decision as to the preferred option. The Toolkit also prescribes that the
principle of ‘proportionality’ should be applied, which means that the resources invested
4
The British government claims its commitment to following five principles of good regulation, and
specifically, that all regulation should be transparent, accountable, proportionate, consistent, and targeted at
cases where action is needed. See http://www.bis.gov.uk/policies/bre/policy/five-principles-of-goodregulation.
13
in carrying cost/benefit analysis are considered proportionate to the expected impact of
the regulation in question.
Step 6: Considering policy enforcement and implementation issues. This step concerns
identifying appropriate means for ensuing that the proposed regulation will be followed
in practice, including consideration of skillsets, resources, and methods required.
Policymakers should also ensure that the regulation is clear and understandable to ease
implementation.
Step 7: Evaluating implemented policy. It is advised that Post Implementation Review is
carried out following the implementation of the policy proposal in order to establish
whether and to what extent the policy has achieved its intended objectives and whether
any further regulatory intervention is required.
In addition, in 2003 the ‘effective consultation’ initiative was introduced as an integral
part of IA process to ensure more transparent and better informed decision making. The
IA Guidance states that informal consultation with stakeholders should occur at different
points in the policy cycle to seek views on cost and benefit estimates, impacts, key
assumptions, points of analysis, and selection of the preferred policy option. It is
suggested that, ‘when a policy proposal is taken out to public consultation the Impact
Assessment must be published’ (BIS, 2011a, p. 10). The IA report should comprise: (i) A
Summary Intervention and Options page containing information about the regulatory
proposal and alternatives being considered; (ii) A Summary Analysis and Evidence page
detailing the full range of costs, benefits and potential impact of the policy options being
considered, and (iii) An Evidence Base providing a mixture of narrative, analysis and
research with additional data and calculations to support the first two stages.
There is therefore a well-established and explicit set of guidelines available which
provide a framework for the conduct of IA in the UK, and by implication, for the work of
the FRC in this area. The above description identifies what can be seen as a set of
qualitative characteristics that should be reflected in the FRC’s approach to IA. Those
characteristics, such as identification of alternatives or specification and monetization of
benefits and costs, also relate to the kind of factors that have conventionally been used in
the literature to evaluate IA through scorecards and other methods. Accordingly, this
study makes use of the IA guidelines developed by BRE as a framework of qualitative
attributes of IA in order to analyse the quality of practices at FRC in exercising its role as
an independent national regulator in the areas of financial reporting and auditing. With
respect to the seven steps in the context of FRC, the analysis focuses primarily on steps 3,
4 and 5. Steps 1, 2 and 6 are to a large extent determined by the incidence of an
accounting or auditing issue and by the general objectives and procedures of FRC for
oversight of corporate reporting and because the analysis is concerned with the use of IA
up to the point at which a regulatory outcome has been determined, post-implementation
review as referred to in step 7 is outside the scope of study.
14
Evidence base
This study looks to appraise the state of IA practices at FRC in the period following the
major reforms of 2004, which led to a significant extension in its regulatory
responsibilities, and following the publication in 2005 of the Better Regulation Action
Plan discussed earlier, which led to the emergence of what is now known as a British
model of regulatory impact analysis and which was influential in the FRC’s own stated
Regulatory Strategy documents. Specifically, our analysis has reviewed regulatory
episodes in the fields of financial reporting and auditing initiated by the ASB and APB
between January 2005 and January 2012. By a ‘regulatory episode’ we identify any
consideration of policy-making or regulatory activity leading to the issuance of new or
revised regulations in the areas of accounting and auditing. As noted earlier, ASB and
APB are two operating boards within FRC that carry out such activities.
The final population contained 30 regulatory episodes (see Appendix for a full list).
Examples of the episodes analyzed include projects on the development and revision of
auditing and accounting standards (often in response to the respective changes in the
international equivalent standards and national laws), and ethical standards for auditors.
In each case, the publication of consultation papers, discussion papers, exposure drafts
and standards are all taken as part of a single regulatory episode but each consideration of
possible revision to existing standards is taken to constitute a new episode. Other
guidance documents published by the FRC boards, such as APB Practice Notes are not
included as these publications are intended only as a source of methodological guidance
for practitioners on the application of standards and are not mechanisms for introducing
any new or additional regulatory burden which would need to be assessed, and hence IA
is not normally relevant.
In addition to analysis of the documentary record available on IA within the two FRC
boards, four staff members were interviewed in three interviews. These people either held
general responsibilities within FRC for the conduct and oversight of IA or had been
involved in undertaking specific IA activities for either ASB or APB. The interviews
were conducted at FRC premises, involved both researchers and lasted for approximately
75 minutes each. In one case a record of the interview was produced from hand written
notes, the others were recorded. The approach to questioning was semi-structured, with
an agenda of issues identified in advance for discussion. The interviews were undertaken
to provide additional insights from those within FRC to illustrate the processes behind
what is visible in the published documents and evidence drawn from the interviews is
referred to below in the analysis and discussion of findings.
ANALYSING THE QUALITY OF IMPACT ASSESSMENT AT FRC
In order to evaluate the contribution that IA makes to regulation of accounting and
auditing by FRC, this section provides a review of the regulatory episodes identified and
a discussion of the content of IA published in relation to these episodes. Specifically, an
analytical overview of the extent and manner of reference to IA is provided, identifying
15
the small proportion of cases where a developed RIA has been undertaken and how the
principal of ‘proportionality’ means that in a large number of cases little explicit attention
is given to IA. This is followed by a detailed discussion of particular illustrative episodes
when more developed IA has been used – the adoption by APB of ‘Clarity ISAs’ for
application in the UK and the development of proposals by ASB for the future of national
GAAP in the environment of convergence to the use of IFRS for financial reporting by
certain classes of enterprise.
Analytical overview of the sample
The regulatory episodes initiated over the period of 2005 to January 2012 have been
categorized into three broad groupings (see Table 1), namely:
(1) Episodes which contained no explicit reference to or evidence of attempts to
undertake regulatory impact assessment;
(2) Episodes which contained some statement making reference to elements of IA
or acknowledging its role but only of a limited or brief nature;
(3) Episodes which were accompanied by a more developed IA reports.
Extent of use of impact assessment
The analysis allows a number of observations to be made about the pattern and extent of
use of IA by FRC. It is apparent that in several regulatory episodes (8 out of 30 analyzed)
no IA was performed or referred to explicitly. Characteristically, such episodes involve
proposals which were not seen as imposing any additional regulatory burden warranting
an impact assessment. These cases included some where the proposed changes were
consistent with current practice, and hence, no IA was considered necessary (see, for
example, the case of a Standard for Investment Reporting (SIR) 2000, Episode 24) or
were simply updating existing requirements and not offering new regulation as such (for
example the ASB’s Amendment to FRSSE, Episode 3, and Statement on Half Yearly
Financial Reports, Episode 6).
The largest proportion of the sample (18 episodes) involves cases where some reference
to elements of IA was present, but the extent and scope of analysis falls short of what
might be considered a full IA. These cases indicate that, although consideration to the
need for IA was given, the nature of the actual process of implementing an assessment
was somewhat sporadic and incomplete. This may suggest recognition of the need to
comply with, and demonstrate compliance with, the expectation to consider regulatory
impact but only by acknowledging the issue in a relatively formulaic and limited way,
accompanied by a standardized invitation for commentators to identify and express views
on costs and benefits.
Only a small number of regulatory episodes contained what can be considered to be, at
least in relation to some issues and areas of analysis, more developed and comprehensive
16
appraisal of regulatory impact. In particular, two cases which provide examples of
attempts to quantified IA exercises are discussed in later sections of this paper.
Identifying and measuring costs
It is clear from a review of the text of references to IA in the large majority of documents
that, with respect to the nature of the issues considered, the cost imposed by regulation is
the most commonly identified element of analysis. A member of the APB staff
interviewed comments as follows:
We know we should be doing a cost-benefit analysis [of proposed regulation],
and there is a general requirement to do that within the FRC. Then we think
about how we do that.
According to the interviewee, the common approach to IA with FRC is
[…] to focus mainly on the cost while presuming that the key implicit benefit
is for regulation to improve audit quality, so the way we see it is that we need
to establish that the costs are reasonable.
However, although the issue of cost may be recognised, analysis almost uniformly lacks
detail and any developed categorization of costs and offers only limited measurement of
costs. In the majority of cases costs are acknowledged simply as something on which one
needs to keep a watchful eye. In several accounting episodes cost is covered by a
somewhat generic statement that ‘[i]n the ASB’s view, the proposals should not impose
significant additional costs of preparation’ (for example, Amendment to FRS 25, Episode
17) but followed by an accompanying point that the ASB ‘believes that the amendments
will result in information which is of benefit to users of financial statements’ or a
conclusion that ‘the cost of the proposed new requirements will not be disproportionate to
their benefit’. These documents thus acknowledge the potential for costs to be incurred
but offer only a simple reasoned argument or statement of belief that the policy is
appropriate without any supporting analysis.
This approach, which is followed in a large number of documents, may be justified as an
application of the principle of “proportionality” that is intended for impact assessment.
For example, in many cases the ASB and APB are reacting to something proposed
through international standards or is proposing only minor amendments to existing
accounting standards. The costs of undertaking an IA itself would be significant in
relation to the resources available to the standard-setter. Proposals often also incorporate
material developed by IASB which itself may make reference to the costs and benefits of
change, although such references also tend to be formulaic statements of “belief” that
costs will be “slight” and that “benefits outweigh costs”.
One example which goes slightly further than the generic statements noted above is the
case of accounting for heritage assets (Episode 1). This subject is covered by a
Discussion Paper issued in January 2006, two exposure drafts, in December 2006 and
June 2008, and a standard, FRS30, issued in June 2009. In this example, both exposure
17
drafts and the standard include sections under the heading of regulatory impact. The
discussion in the exposure drafts attempts to be more specific about how costs might
arise, stating that they will “will largely fall on preparers” and will include the costs of
determining the approach to valuation, obtaining valuations and meeting disclosure
requirements. However, beyond this there is no attempt to estimate costs. Rather the
argument is simply made that the requirements themselves allow a cost-benefit approach
to be applied in the choice of accounting policy and consequently there is no
‘disproportionate’ cost imposed by the standard. This episode illustrates an approach to
IA based on what might be called reasoned discussion and consultation but without
monetized estimation of costs and benefits and it would be difficult to conclude that the
IA itself was influential in regulatory policy.
The Exposure Draft of ISRE 2410 ‘Review of Interim Financial Information Performed
by the Independent Auditor’ (Episode 22) stated that ‘the impact of costs of engagement
[…] could vary between negligible in some circumstances and no more than 5% in
others’, but the basis for and coverage of this valuation is unstated. In addition, while the
direct cost of compliance with the proposed regulation (such as an increase in the amount
of audit work) may be identified, second-order effects of such proposals (such as on
market conditions and economic development) are almost entirely ignored. An
illustrative exception to this point is the development of Standard for Investment
Reporting (SIR) 5000 (Episode 23), where reference is made to the potential cost on the
functioning of the financial markets, but it is simply concluded that the ‘incurring of
undue additional costs […] [was] a low risk’.
Identifying and measuring benefits
Attempts to identify the benefits from proposed regulations were observed in only a
handful of episodes. In such cases benefits were usually identified in relation to the
expected improvement in the standard of financial reporting and auditing practice,
rigorousness of internal processes, and ultimately, the quality of their outcomes. Some
cases discussed benefits linked to the objective of minimizing the cost burden on the
recipients of regulation, i.e. auditors. An example is the statement that ‘auditors may find
it necessary to advance in time some procedures that would otherwise be performed later
in the year for the audit of the next annual financial statements’, which ‘would increase
the costs attributable to the review but these should be offset by a related reduction in
costs attributable to the year end audit’ (Exposure Draft for ISRE 2410 (Episode 22)).
Furthermore, the boards’ approach to considering the benefits of its regulatory activity
includes an emphasis on producing regulation that is seen as serving the interests of a
wider society. This emphasis finds its way into the regulators’ rhetoric used to explain
regulatory outputs, as, for example, in the statement that ‘[i]t is considered to be in the
public interest for public reports issued by reporting accountants to be governed by
appropriate standards’ (SIR 5000 (Episode 23)).
A further point from the analysis of cases in the second group is that benefits are
discussed mainly in terms of the intended effect of a proposal and not in terms of the
quantified economic value of such an effect. In other words, as with quantification of
costs, the quantification of potential benefits arising from adopting proposed regulation
18
seems to present a particular challenge for regulators. For example, the brief statement
that ‘the residual costs associated with the requirements of the final ESRA […] [were]
proportionate, given the benefits of having consistent ethical standards for audit and
reporting accountant engagements’, provides no detail of an analytical rationale behind
such a statement (Feedback Paper relating to the Ethical Standards for Reporting
Accountants (ESRA) (Episode 21)). This point is supported by the following comments
made by the interviewees responsible for developing accounting and auditing standards,
respectively:
You can come up with the cost side, but quantification of benefits, in
particular in the area of financial accounting and reporting standards, has
always been very-very difficult. There are more intangible benefits than
tangible ones. […]
If the information that is produced will change from X to Y, why is Y better,
why do you think this will lead to a better outcome? Maybe lower cost of
capital, but then how do you quantify better information to the users, better
investment decisions made, or maybe something else? You don’t really know.
[…] you cannot really put a hard number on the benefit of improving the
quality of audits. You end up speculating whether it is about reducing audit
failures or improving the society as a whole.
Recognizing policy alternatives
A sixth observation concerns the extent to which policy alternatives are recognised in the
statements on IA, as suggested in the IA Guidance developed by BRE, which encourages
use of IA for comparison between alternative policy scenarios (BIS, 2011a). The
difficulties that are apparent for the FRC boards in identifying, quantifying, and
contrasting costs of regulation and associated benefits may have a negative effect on the
quality of discussion of regulatory alternatives. This tendency can be clearly observed
from the IA statements in the FRC regulatory episodes reviewed in this study. Only a
handful of episodes contain some explicit discussion of alternative ways of achieving
desired policy objectives, including the so called ‘nil’ option (no regulatory action).
Among the few examples is the APB’s 2007-2008 project on formulating an appropriate
regulatory response to the issuance by the IAASB of a ‘clarified’ version of ISA 600
‘Special considerations – Audits of group financial statements’ (Episode 25). In its
Discussion Paper for this project, APB sought stakeholders’ comments on three ‘possible
actions’ (p.7): (1) early adoption of ISA 600 (before completion of the Clarity Project by
the IAASB); (2) converting ISA 600 to a (non-binding) Practice Note, a form of
document usually used to illustrate best practice rather than introduce mandatory new
requirements; and (3) a ‘Nil’ option of not adopting ISA 600 until IAASB implemented
the full suite of clarity ISAs. Among the benefits of adoption highlighted in the
Discussion Paper was the argument that the new provisions ‘would be in line with the
most up to date thinking and, in the opinion of the APB, the best available standard’
(p.8). Against this option, it was noted that there were ‘costs associated with the
introduction of any new standard’ as a result of ‘additional work’ and the fact that ‘audit
firms need to integrate the new standard in their manuals and methodologies and provide
19
appropriate training for staff’ (p.9). The argument stated for the second option was stated,
while signaling the best approach to group audits, it would avoid implementation costs
due to the non-binding status of a Practice Note. In support of the third (‘nil’) option, the
APB argued that ‘[w]hilst the baseline of best practice may be raised by early adoption,
the APB is not aware of any significant failings in group audits currently undertaken in
the UK and Ireland that need to be addressed by implementing ISA 600’ (p.9).
Reliance on public consultation
A particular feature of FRC’s IA practices is its extensive use of public consultation
procedures as part of policy development. In this respect, this study confirms the
conclusions drawn in the report following the review of FRC by BRE (BRE, 2010a)
which pointed to FRC’s wide-spread acceptance of consultation. However, the manner of
consultation with respect to IA can also been in another light. Specifically, consultation is
often used not to seek stakeholders’ views on the assessment of the impact of policy
position but rather as a means to validate necessary assumptions and understanding for
policy decisions. The text of consultation papers and exposure drafts published by ASB
and APB often contain not only invitations to comment but also to effectively participate
in helping complete the requirement to consider the impact of regulatory measures being
considered. A member of the APB staff provides the following commentary in relation to
the Board’s work on IAS 600 (Episode 24) and the ‘Clarity ISAs’ project (Episode 30).
We sent out a questionnaire to all major six audit firms containing all the
requirements in the proposed standards. We asked about possible cost increases,
and then we had a column at the end where we asked whether or not those
increases were justified.
A large number of the documents issued by ASB thus make reference to the issue of
impact assessment in a relatively simplified and limited manner. Typically these
references contain a statement that the board believes costs do not outweigh benefits but
welcomes comments on the issue and in the case of exposure drafts, the Invitation to
Comment section includes a specific question on this issue and asks for the impact to be
both specified and quantified. A specific example of this type of approach is contained in
the following extract:
Regulatory Impact
6. In the ASB’s view, the proposals set out in this FRED should not impose
significant additional costs of preparation. The ASB believes that the
amendments will result in information which is of benefit to users of the
financial statements. The ASB, however, would welcome views on whether
there are any significant costs resulting from these proposals and, if so whether
they can be quantified. The ASB would also welcome views on whether the
benefits arising from the proposals in this FRED outweigh the costs involved.
Invitation to Comment
Question 5 The ASB considers the benefits of implementing the proposals in
this FRED outweigh the costs involved. Do you agree? If not, why not? It
would be helpful if any significant cost that would arise on implementation of
20
the proposals could be identified and quantified. (Extracts from FRED:
Improvements to Financial Reporting Standards 2009 (Episode 15))
This somewhat formulaic approach found in most policy proposals highlights that
reliance is placed on the principle of consultation to demonstrate due process for impact
assessment in the context of financial reporting regulation. In addition, it means that the
issue of identification and quantification of costs associated with regulatory change is
effectively delegated to commentators and policy stakeholders themselves (such as the
accountancy firms as the main recipients of accounting and audit regulation), and the IA
essentially comprises only consultation. The regulatory impact section in the final
standard on Heritage Assets (Episode 1), makes reference to the ‘extensive consultation’
undertaken in developing the standard as though this in itself constitutes an exercise in
impact assessment. Although it is acknowledged that that consultation raised concerns
about costs, the stated outcome remained that ASB ‘continues to believe’ in the value of
the policy proposals.
Recognizing implementation issues
The manner in which the IA references are made in the majority of cases includes limited
explicit reference to implementation issues, considered an essential step in the official IA
Guidance. Our interviews with the FRC staff involved in carrying out regulatory impact
assessment indicate that these issues have been deemed important, with one interviewee
referring to the need for ‘a feedback loop for once the standards have been put in place,
after a number of years (maybe four or so), so that one could then see what their effects
would be’. At the stage of policy formulation, consideration of implementation issues has
mainly taken the form of discussion of the appropriate time frame for adopting
prospective regulation. In Episode 28 dealing with revision of the Ethical Standards (ESs)
for auditors, for example, APB argued in its Feedback Paper on Responses to the
Exposure Draft that ‘[t]he timing of APB’s review of the ESs has been accelerated to
accord with the Government’s timetable for the implementation of the SAD [European
Union’s Statutory Audit Directive]’ (p. 2). The same episode also provides a rare
example of a post-implementation review carried out following the issuance of particular
regulatory item. The review, in spring 2007, looked at the effects of implementing the
first version of the Ethical Standards which had been adopted in 2004 prior to the start of
work on amending the standards. In the vast majority of cases, post implementation
reviews were not systematically embedded in the policy cycle and most often occurred
sporadically.
The analysis so far refers primarily to the large number of episodes in which IA is
referred to but there is little detailed analysis, discussion or quantification of impact. As
noted earlier, only a small number of regulatory episodes contained a more rigorous and
developed approach or anything that represents a full regulatory impact appraisal. The
discussion which follows refers to two major episodes of potential regulatory
development where IA has been employed in a more comprehensive manner, one drawn
from each area of auditing and financial accounting regulation.
21
Clarity ISAs
One of the most significant projects carried out by the APB in recent years has been a
revision of auditing standards (which since 2004 have been based on International
Auditing Standards (ISAs)) in accordance with new ‘Clarity ISAs’5 issued by the
International Auditing and Assurance Standards Board (IAASB). At the outset, APB
opted for a revision when IAASB completed its Clarity Project rather than in parallel
with it (APB, 2005). Consequently it was not until 2008 that a Discussion Paper was
issued to seek stakeholders’ views on when and how to update the ISAs (UK and Ireland)
for the new clarity standards (APB, 2008a). The paper stated that one of the main reasons
behind this decision was a desire ‘to benefit efficiently from future improvements in the
ISAs’ (p. 1). It also posed questions about the preferred adoption scenarios (options),
including updating national standards for ‘clarified’ ISAs (1) as soon as practicable; (2)
after ‘clarified’ ISAs had been endorsed in Europe (an objective discussed in the EU’s
Statutory Audit Directive), (3) individually for some of the improvements embedded in
the revised standards, or (4) for audits only of listed companies (p. 11). The issue of
whether or not to adopt the new ISAs for audits of entities of all sizes was highlighted as
having a particular significance for the APB and its SME Audit Sub-committee,
representing smaller audit firms and sole practitioners, given concerns about the
appropriateness of extending the requirements to this type of auditor (p. 6)6.
In its review of the differences between the provisions of the national and international
auditing standards, APB pointed to a significant increase in the number of requirements
in the ISAs following the clarification changes as well as to the introduction of new
provisions to improve audit quality. It noted, however, that this increase in requirements
was not expected to lead to a similar increase in the required changes in audit procedures
or in future work effort. In support of this statement, APB staff undertook an assessment
of the potential impact of applying ‘clarified’ ISAs on audit costs. The data were obtained
from 11 audit firms (6 largest and 5 small UK audit firms) and covered a total of 27 audit
engagements. The fact that this assessment was undertaken can be seen as a significant
development because, as noted above, APB had previously relied mainly on the outcomes
of public consultation rather than exploratory work and analysis undertaken by its own
staff to incorporate IA into its regulatory process.
The assessment undertaken was comprehensive relative to that evident in other regulatory
episodes as it, for example, distinguished between the impact on recurring (direct) and
non-recurring audit costs (e.g. time spent explaining the changes to the client, changes in
the audit engagement letter etc.), noting that a relatively higher percentage of cost
increases suffered by smaller auditors compared to the large audit firms were driven by
the differences in the number of base hours affected and, consequently, cost impact per
5
In 2004, International Auditing and Assurance Standards Board, a global standard setting body that issues
ISAs, initiated a ‘Clarity Project’ aiming at making ISAs more readable, understandable and reliable
through revising the way in which standards are presented, including setting an objective of each ISA,
clarifying the obligations it imposes on auditors, and eliminating any possible ambiguities (IAASB, 2004).
6
In particular, APB together with its SME Audit Sub-committee held such discussions in relation to each of
the ‘Clarity’ ISA and responded to every exposure draft issued by IAASB (APB, 2008a).
22
hour (APB, 2008a, Appendix 2.). Rather than focusing on the size of the auditor as a
primary cause of increased cost impact, APB noted that the increase should rather be
attributed to ‘the extent to which the audit firms’ current methodology and practice
already incorporates the requirements of the Clarity ISAs’, as well as whether the
characteristics of an audit engagement led to auditors’ reliance on particular (more
revised) standards. With regards to the latter point, APB noted specifically that ‘the
impact on work effort (and consequently cost) derive substantially from the ISAs that
have been revised rather than those that had been clarified only’. The cost impact of
‘Clarity ISAs’ (particularly ISA 600) on group audits, on the other hand, was found to be
less significant for smaller audit firms compared to the larger ones due to the fact that
such firms tend to audit relatively simple groups.
When APB announced in March 2009 its decision to recommend the adoption of
‘clarified’ ISAs ‘as soon as practicable’7, it, inter alia, referred to the above cost
assessment as a way to justify and clarify its policy position (which it claimed had also
been strongly supported by the stakeholders that took part in the 2008 consultation) that
‘the same standards should apply to all audits […] as otherwise there would be a risk of
creating a two tier level of auditing which could undermine the credibility of smaller
audits’. As Richard Fleck, the then Chairman of the APB, commented in this respect:
Throughout IAASB’s Clarity Project we have been conscious of the impact that the
new standards might have on smaller audits. Our SME Audit Sub-committee has
been heavily involved in helping us respond to exposure drafts and achieve
important changes in the final standards.
The responses to our consultation demonstrate how committed the profession is to
having a single set of standards for audits of all sizes.
For these reasons APB has concluded that the benefits of implementing the new
standards exceed initial costs and have decided that they should be applied as soon
as is practicable.
Although the Clarity ISA episode demonstrates more careful consideration given to IA
than is the norm, there continues to be a questiom about the extent to which IA has
actually informed the regulatory process and the resulting choices (the above statements
do not appear to provide a definitive answer to this question) or has been used as a tool
for justification of policy only. Our interview data indicate varying enthusiasm for IA
among FRC staff as well as some doubts as to whether IA can really shape or even
change regulatory outcomes, as illustrated in the comments which follow below.
Specifically, while acknowledging that ‘it is good that IA is done, especially with regards
to assessing the impact of new regulation’ and that ‘it is not enough to just say that we,
See ‘The APB announces its intention to update UK and Irish Auditing Standards for the new
International Standards on Auditing for 2010’. http://www.frc.org.uk/apb/press/pub1880.htm. The
announcement was followed by a second round of consultation (APB, 2009) on the exposure drafts of
‘clarified’ ISAs (UK and Ireland) and, in October 2009, of the final endorsements of the standards.
7
23
the standard setter, want this and this done regardless of the cost’, the interviewee
nonetheless admitted that:
If tomorrow we were told we need to do IA of a particular policy issue because we
potentially may want to develop a standard in the future, I am sure people would say
‘we need to do an impact assessment’, but I would not say it is firmly embedded in
the APB staff working practice. […]
If we are careful enough about the standard that we want to develop in the first place,
then I don’t think IA would change much in what we are doing.
The Future of UK GAAP
The episode which stands as the most developed attempt by ASB to undertake IA is that
of the future regime of national accounting standards in the light of convergence with
international reporting standards, and particularly the requirements that should apply to
smaller and medium sized enterprises. This is an area of particular significance for
financial reporting as it involves whole question of maintenance of separate accounting
standards in UK and the applicability of IFRS beyond listed entities. As a consequence it
has not been an been an easy area to regulate. The process of development has been long
and involved several documents and, at the time of writing, is still not complete. The
purpose in the present analysis is not to consider what is the appropriate regulatory policy
with respect to accounting requirements, smaller entities and national standards but rather
to evaluate the manner in which IA has been called upon in the debate and whether it has
influenced the process of policy development.
The history of the ASB’s consideration of the future role of national standards has
involved several discussion documents, consultations and exposure drafts and can be
traced back to a Discussion Paper issued in 2004, which provided a wide ranging
consideration of the issue but contained only limited reference to anything specifically
relating to identified costs, benefits or burdens. At this stage the FRC was only adopting
its new Regulatory Strategy and IA may not have been a major consideration in the
development of the Discussion Paper. A more recent Consultation Paper in 2009 went
further in trying to identify the number of entities that could be affected by different
national GAAP requirements and the invitation to comment included a request for
identification of both costs and benefits. That consultation was followed by two Exposure
Drafts (FREDs 43 and 44) in 2010 which proposed that a three-tier financial reporting
framework would apply to different types and sizes of entity based on a concept of
“public accountability”. The FREDs incorporated a draft impact assessment which, at
some 74 pages in length, far outweighs the approach to IA in any other FRC publication
in the period under review. This draft impact statement was accompanied by outreach
activities involving meetings with audit firms, preparers, investors and others to raise
awareness of the proposals. The outcome of that consultation was that in 2011 the ASB
indicated that it was redeliberating its proposals. The concept of public accountability
was to be dropped but the underlying ideas of a tired system of requirements and of
24
reduced disclosure for certain enterprises would continue to be followed. In January
2012, three new exposure drafts (FREDs 46, 47 and 48) were published, incorporating a
revised, very much reduced impact assessment and at the time of writing these documents
constitute the best guide to the likely outcome on this regulatory episode.
As noted above, the 2010 FREDs were accompanied by a very detailed IA and the
invitation to comment included six questions specifically arising from the IA. Notable
features of the draft IA include:








The document is organized into three main sections: a discussion of the justifying
rationale for the proposals; identification of the changes in reporting requirements
that would result; and estimates of costs and benefits.
An appendix includes a discussion of alternative courses of action and why they are
considered inappropriate, including consideration of a ‘do nothing’ option.
Considerable effort is made to identify costs in detail, for example the costs of
transition and continuing costs, the costs from new application of certain IFRS
requirements, training, likely charges to entities by audit firms etc.
There is a narrative discussion of impact and specific cost estimates are developed for
scenarios covering a series of different types of entity, depending, for example, on
whether it is a quoted company, has complex transactions etc.
A summary table includes estimates for a eight different scenarios and arrives at a
specific estimate of the cost of the proposals of £78.9m (table 3, p.133).
The discussion of benefits includes reference to factors such as the value in general of
high quality financial reporting, possible reductions in the cost of debt and equity
instruments and the intellectual mobility of accountants trained in IFRS.
However, the ASB also states that ‘the benefits are impossible to quantify in a
realistic way’ and notes that the £78.9m costs would be outweighed by ‘even a very
small reduction in the cost of borrowing’.
Overall, it is concluded that the benefits outweigh the costs of the proposals.
It is apparent from a review of the 2010 documents that a considerable amount of effort
had been devoted to trying to conduct the IA in a detailed and appropriate way. There is
monetary quantification of costs, the specific situations of different types of entity are
considered and input from stakeholders is sought. Notwithstanding the degree of
development of IA in order to help demonstrate the case for the proposed regulatory
approach, the response to the proposals forced the ASB to rethink at least some aspects of
its intended policy and significant changes were reflected in the proposals that have been
brought forward in the January 2012 FREDs. Those changes include dropping the
concept of public accountability as a basis for differentiating entities, with the result that
an IFRS framework will apply when legally required rather than by reference to that
concept, altering the circumstances where reduced disclosure requirements apply and
even changing the name of one of the framework documents.
The new proposals published in 2012 include both a revised IA discussion and a feedback
statement in response to the comments received on the original IA. The evidence
presented of comments submitted on 5 specific questions about the IA, together with the
25
related interpretation by ASB for developing policy, is summarized in Table 2.8 It is
striking that only a minority of commentators chose to submit a response to the IA
questions, suggesting that most did not regard the IA as the critical basis on which to
either evaluate the proposals or make representations for alternatives. This position
echoes a comment contained in the draft IA regarding the process by which it had been
developed:
‘In a number of its consultations, the ASB requested feedback on the anticipated
costs and benefits of its proposals. However, this was rarely the focus of
respondents’ concerns.’ (Draft Impact Assessment, para 11.65.)
One of the arguments for IA is that by making costs and benefits explicit the interests of
those subject to regulation are protected and they are not subject to regulation that
involves unwarranted costs. The low level of comment on IA questions suggests that in
this case stakeholder groups affected by the proposals did not consider the IA to be the
key element on which the regulatory policy should be evaluated.
Further, within the minority of commentators who did address the IA questions, it is
apparent that only small proportions expressed agreement with the propositions put
forward by ASB using IA as support for their regulatory proposals. Only 27% of
respondents agreed with the benefits identified, only 5% with the nature and range of
costs in the IA and only 8% with the analysis of affected groups. Notwithstanding these
figures, the reaction of the ASB has broadly been to reiterate its belief in the main aspects
of the intended regulatory policy. For example, there are repeated statements that the
ASB ‘believes’ or ‘continues to believe’ in its proposals notwithstanding the fact that
some commentators felt the benefits were overstated. Some support for the continuation
of the broad policy approach is provided by the fact that on the question of the overall
balance of costs and benefits, however, 23% agreed the benefits would outweigh costs,
while 10% disagreed.
Alongside the Feedback Statement on the responses to the Draft Impact Assessment, the
January 2012 exposure drafts are also accompanied by a revised IA. This is a much
revised and shorter document than the original draft. Perhaps most significantly the
approach to identifying and measuring costs and the discussion of benefits are radically
different. Although some additional scenarios are introduced to discuss the impact on
some additional classes of entity, unlike the 2010 IA none of the scenarios includes
quantified estimate of the cost likely to be incurred by such entities. The scenarios are
placed in an Appendix to the IA rather than within the main evidence section. There is
also no aggregation into a new estimate of the total costs of implementation. Rather the
discussion includes a statement that ‘it is not possible to determine with any accuracy an
average cost or even a meaningful range for entities implementing the proposal’ (Revised
Draft Impact Statement, para 6.10). In the same paragraph, however, the ASB goes on to
refer to the total estimated cost of £80m and states that it ‘continues to believe’ this will
be the total cost. With respect to benefits, it is striking that the entire section discussing
8
The Feedback Statement does not provide analysis of responses on a sixth question concerning the
effective date for implementation and the benefits of early adoption.
26
the potential impact on the costs of debt and equity has been replaced by only a brief
reference to this possibility. This is notable given that in the ASB’s overall statement in
the original IA that the expected costs would be outweighed by even a small reduction in
the cost of borrowing.
Overall, the Future of Financial Reporting episode stands as perhaps the most developed
example of IA associated with the FRC’s regulation of accounting. However, at the same
time, it also illustrates aspects of the real difficulties that are apparent in applying IA and
consequently the limits on its influence in regulatory policy making. The difficulties in
estimating costs and the abandonment of cost estimates for different types of entity, the
‘impossibility’ of quantifying benefits and the apparent lack of engagement of the
majority of stakeholder commentators with the content of the IA all point to a conclusion
that impact assessment is easier to advocate as part of the rhetoric of better regulation
than to apply in a way that can genuinely influence the regulation of accounting and
auditing. Despite the substantial IA developed in this episode, there is little to suggest
either that the original direction of regulatory policy was formed on the basis of IA or that
stakeholder reaction and subsequent changes in policy were determined by the content of
the IA.
DISCUSSION AND CONCLUSIONS
IA has increasingly been advocated as a tool for better policymaking and as a common
basis for dealing with the entire lifecycle of regulation, from formulation to enforcement
and implementation (Radaelli, 2010). The objective of this paper has been to evaluate
whether this claim is evidenced in the field of financial reporting regulation by examining
the contribution that IA procedures have made to the process of independent regulation of
accounting and auditing within the Financial Reporting Council, a non-governmental
regulator for the corporate reporting and governance in Britain.
Prior research, mainly with reference to governmental agencies (Jacobs, 2005 and 2006;
NAO, 2010; Radaelli, 2010), has reported ‘the perception that the changes affecting IA
have been pushed down from the top political level’ (Radaelli, 2010, p. 98) as a means by
which higher-level agencies exercise political control over policymaking administered by
their executive departments (Radaelli, 2010). In contrast, the case analysed in this study
reveals a somewhat different reality, one characterized by non-government policymaking
in which the subordinate relationship and top-down accountability common for
government institutions is much more indirect but where the expectation of adherence to
the IA rationale is still explicit (Maggetti, 2010). The case of FRC illustrates how, in a
situation of independent regulation where regulatory authority is not, at least in principle,
guaranteed, the meaning of IA has been reconfigured toward more implicit but nontrivial
rationales which place emphasis on the legitimacy of the regulatory process (Majone,
1996) as a means to acquire credibility and a positive public image, and with them,
political acceptance. This is illustrated both by a growing awareness of the need for
impact assessment among relevant staff within FRC following the issuance of the Better
Regulation Action Plan in 2005 and also by the FRC’s extensive reliance on public
27
consultation. In the case of the FRC boards examined in this study consultation can to an
extent be seen as an important means by which the requirement for IA is satisfied; that is,
often consultation is effectively a means of doing IA rather than validating IA through the
response of interest groups. In a large number of cases respondents are invited to
comment on and provide evidence about impact (particularly costs) rather than respond to
an analysis provided by the FRC boards. This approach carries an implicit assumption
that in the absence of widespread comments from respondents to the contrary the benefits
of the proposal can be taken to outweigh the costs and thus the expectation that
assessment of impact should influence policy decisions has been met. Reference to IA in
exposure drafts and consultation papers shows attempts to enhance transparency and
public awareness of the regulatory process as well as legitimize its outcomes.
The rationale of IA is that it is truly of value only when it becomes an integrated
analytical framework which influences real policy decisions. A key question, therefore,
concerns the extent to which RIA has actually been embedded in the organization’s
existing routines and the specific purposes it serves. Our review of the contents of the IA
undertaken by ASB and APB questions the extent to which IA is used as a means to
inform the regulatory debate and choices that follow or more as a way to justify and
provide a scientific underpinning to the policy decisions that are likely to have been made
even in the absence of IA. Specifically, our examination raises questions about the
identification of policy alternatives (the majority of regulatory episodes analysed had
limited or no discussion of alternative ways of achieving the stated regulatory goals) and
the considerable challenges of quantifying costs and benefits and placing financial
estimates on the expected impact of policy. It should be emphasised that this does not
necessarily imply a deficiency on the part of the FRC boards attempting to meet
expectations for IA but rather that the expectation itself may be flawed and reflect a
political agenda around the burdens associated with regulation of business rather than a
genuinely valuable means of determining regulatory policy in the fields of accounting
and auditing. In many cases there is only really one available policy option that is
realistic, for example in the case of adoption of international standards to which there is
already a general commitment or legal requirement. Similarly, attempts to estimate
reliably the costs and benefits or regulation can be very difficult to achieve and
potentially become tenuous and speculative. Therefore the requirement to satisfy the need
for IA is itself problematic and it can be difficult to see precisely on what basis informed
discussion and comparison of the impact of policy options can take place. Fraas and
Lutter (2011) express similar concerns in their assessment of regulatory governance of a
group of independent regulators in the U.S., including SEC, which fall outside the
process of regulatory planning and review imposed on governmental agencies.
Specifically, they note that independent regulators ‘appear to be issuing major regulations
without reporting any quantitative information on benefits and costs’ and ‘without any
formal review of alternatives’ (Fraas & Lutter, 2011, p. 2)
Our analysis has also identified a primary emphasis on the cost impact of regulation and
the expected burden on companies and audit suppliers, often to the exclusion of
identifying and analysing other (possibly significant), second-order impacts, for example,
for the users of accounting/audit reports, the accounting profession as a whole, or indeed
the broader economy. The focus on costs and the general approach to the way in which
28
they are discussed in IA references in the documents reviewed suggests an underlying
concern to demonstrate that costs are manageable and affordable and therefore do not
stand as an impediment to proceeding with regulatory action. Similar concerns over
whether or not and how regulation addresses the interests of the entire body of
stakeholders rather than some particular groups have also been expressed in relation to
other regulatory institutions with greater influence than FRC, such as the EU itself. The
European Commission’s recent proposals for reform of the European audit market
(European Commission, 2011a) and the accompanying IA (European Commission,
2011b) were met with widespread criticism by both mid-tier and large (Orlik, 2011a and
2011b) audit firms for failing to cater adequately for their needs. The UK arms of the Big
Four audit firms, for example, criticized the measures for providing ‘no concrete
evidence for any positive impact’ and ‘a lack of proper impact assessment for the
increased cost to business’ (quoted in Orlik, 2011a). At a general level, preferential
treatment of some stakeholders and ignoring others can lead to the situation when ‘the
problems of [regulatory] legitimacy become insurmountable’ (Radaelli, 2001, p. 275).
The above conclusions suggest that either there is scope for much more development on
the application of IA to the problems and issues that arise in national regulation of
accounting and auditing (for example, the fact that in the UK standards are intended to be
primarily principles-based) or that the limitations of IA should be seen in a more realistic
light and the expectation that it provides a major part of the regulatory process revised.
Determining the impact of policy measures which themselves are designed with a fair
degree of abstraction and are subject to interpretation is a complex and challenging task.
This raises questions about the format of IA rules themselves, and specifically, whether
they should be designed in an abstract way which can address this complexity,
irrespective of the policy context, actors, or issues at hand, or alternatively, produce
carefully formulated definitions of preferred treatments to aid application. In this regard,
the comment by Carmona and Trombetta (2008) in relation to the rules vs. principlesbased dichotomy in accounting standard setting appears to resonate fully with the
dynamics of IA practice in that detailed implementation guidelines ‘considerably reduce
uncertainty […], which ultimately results in a mechanical application of the specific rules
established in the standards’, and to some extent, contributes to ‘the commonly held view
of the accounting profession as ‘‘dull”’. In contrast, they argue, ‘the principles-based
nature of […] standards and the related notions of openness and flexibility exert a lasting
effect on the educational background and professional skills’ (p. 457). In the context of
IA, resolving the principles vs. rules dilemma ultimately boils down to a balancing act
between the risk of IA becoming a ‘dull’, overly-prescriptive and therefore artificial
instrument, on the one hand, and, on the other hand, the need to gradually increase the
quality and robustness of IA practice by reducing the number of ‘unknowns’.
The underlying motivation for this study was to evaluate the contribution of impact
assessment for the regulation of accounting and auditing, illustrated through the work of
one national regulator subject to expectations that it utilise IA in order to achieve “better
regulation”. The analysis suggests that the direct influence of IA on regulatory outcomes
for accounting and auditing in the UK has been very limited. While the FRC boards have
recognised the imperative for IA, the practicalities and difficulties of implementation
have meant that this has often meant references have been made to IA for the purpose of
compliance rather than as a primary means of determining policy choice. The problem of
29
limited real policy options, the difficulty of producing reliable financial estimates,
particularly for benefits, and the cost associated with IA itself have limited the extent to
which full IA has become embedded in regulation via the FRC. The principles and
objectives underlying political commitment to IA may themselves be valid, but the
realities of implementation make it a limited tool for regulatory policy choice in
accounting and auditing.
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World Bank.Table 1
33
Table 1: An overview of the approach adopted to impact analysis in documents
published for FRC regulatory episodes January 2006-January 2012
Regulatory episode
Reliance on RIA
No
(no
reference to
RIA)
Weak
(generic
reference,
some
elements of
RIA)
Stronger
( more
advanced use
of RIA)
Accounting Standards Board
1
2
3
4
5
6
7
8
Heritage Assets
FRS 20
FRSEE
FRS 17
FRS 25
Half Year Financial Reports
FRS 3







21
22
23
Statement of principles for Financial
Reporting: Interpretation for Public Benefit
Entities
FRS 8
FRS 26
FRS 20_2
Improvements to Financial Reporting
Standards 2008
FRS 29
FRS 2, FRS 6 and FRS 28
Improvements to Financial Reporting
Standards 2009
UIFT Abstract 42 and FRS 26
The Future of UK GAAP
FRS 25_2
Improvements to Financial Reporting
Standards 2010
FRS 29_2
Auditing Practices Board
ESRA
ISRE 2410
SIR 5000

24
25
26
27
28
29
30
SIR 2000
ISA 600 (UK and Ireland)
ISA 700 (UK and Ireland)
ISA 700 (UK and Ireland) Revised
Ethical Standards for Auditors
Ethical Standards for Auditors 2
ISA Clarity Project

9
10
11
12
13
14
15
16
17
18
19
20





















34
1 The benefits
identified
2 The nature and
range of the
costs identified
in the illustrative
scenarios
Other
No
comment
ASB response to comments
(references to paragraph numbers in the Feedback
Statement on the Draft Impact Assessment)
27% 13% 56% 4% ASB agrees that quantification of benefits is challenging.
The ASB believes the proposals will deliver
improvements in reporting and cost benefits (3.3)
ASB continues to believe proposals provide benefit to
users (3.4)
Overall ASB continues to believe proposals will deliver
benefits (3.7)
5% 33% 62%
The use of case scenarios was well received; the problem
is accurately identifying the range of costs (3.9)
ASB has continued with cases, but has decided against
providing a possible range of costs because the range is
so wide it is unlikely to be useful (3.10)
Reduced disclosure proposals offer cost savings to
qualifying entities (3.11)
ASB believes the standard has the potential to reduce
costs for all preparers (3.12)
Do nothing not a realistic option and some costs
inevitable (3.13)
8% 18% 74%
Added additional organizations to case scenarios (3.16)
Decided not to extend application of IFRS beyond
entities where it is required by law (3.17)
23% 10% 60% 7% Pleased that “respondents agreed that overall benefits of
the proposals outweigh the costs and proceeded on that
basis (3.21)
Changes in transitional arrangements and options (3.22)
Comment
3 The analysis of
“the main
affected groups”
4 That the benefits
outweigh the
costs of
transition and
ongoing
incremental costs
Disagree
Question
Do you agree
with…
Agree
Table 2: Analysis of responses to consultation questions on draft Impact Assessment for
The Future of Financial Reporting proposals
5 Other comments
on the impact
assessment
15%
85%
Comments largely relate to matters covered by above
questions
Source: Feedback Statement on the Draft Impact Assessment, ASB, January 2012.
35
Appendix
Regulatory episodes and related policy documents
Accounting Standards Board
Heritage Assets
1
DP
ED
January 2006
December 2006
ED
S
June 2008
June 2009
ED
March 2006
S
March 2008
ED
S
S
April 2006
January 2007
June 2008
Amendment to FRSSE
FRSSE (effective January 2007)
FRSSE (effective April 2008)
FRS 17
ED
May 2006
S
RS
Dec 2006
January 2007
Proposed Amendment to FRS 17 'Retirement Benefits' and Reporting Statement
'Retirement Benefits - Disclosures'
Amendment to FRS17 'Retirement Benefits'
Reporting Statement: Retirement Benefits - Disclosures
FRS 25
ED
July 2006
ED
March 2008
S
August 2008
ED
RS
February 2007
July 2007
ED
CP
S
March 2007
Proposed Amendment to FRS 3 'Reporting Financial Performance'
April 2007
Consultation Paper: IASB Exposure Draft of a proposed IFRS for SMEs
July 2007
Amendment to FRS 3 'Reporting Financial Performance'
Statement of Principles for Financial Reporting: Interpretation for Public Benefit Entities
DP
May 2003
ED
August 2005
RS
June 2007
2
3
4
5
6
7
8
Discussion Paper 'Heritage Assets: can accounting do better?'
Financial Reporting Exposure Draft 'Accounting for
Heritage Assets' (FRED 40)
Financial Reporting Exposure Draft: 'Heritage Assets' (FRED 42)
FRS 30: Heritage Assets
FRS 20
Amendment to FRS 20 (IFRS 2) 'Share-based Payment' Vesting Conditions and
Cancellations
Amendment to FRS 20 (IFRS 2) 'Share-based Payment' Vesting Conditions and
Cancellations
FRSSE
Amendment to FRS 25 (IAS 32) 'Financial Instruments: Presentation' Financial
Instruments Puttable at Fair Value and Obligations Arising on Liquidation
Proposed Amendment to FRS 25 'Financial Instruments: Presentation' Puttable
Financial Instruments and Obligations Arising on Liquidation
Amendment to FRS 25 'Financial Instruments: Presentation' Puttable Financial
Instruments and Obligations Arising on Liquidation
Half yearly financial reports
Statement 'Half-yearly financial reports'
Half yearly financial reports
FRS 3
Discussion Paper 'Statement of Principles for
Financial Reporting: Proposed Interpretation for Public Benefit Entities'
‘Statement of Principles for Financial Reporting: Proposed Interpretation for
Public Benefit Entities’
Interpretation of the Statement of Principles for Financial Reporting: Interpretation
36
for Public Benefit Entities
FRS 8
9
ED
ED
S
July 2007
October 2007
December 2008
FRED 41 'Related Party Disclosures'
Exposure Draft Amendments to FRS 26 (IAS 36)
Amendment to FRS 8 'Related Party Disclosures':
Legal Changes 2008
FRS 26
ED
ED
October 2007
October 2007
S
November 2008
ED
January 2008
S
August 2009
ED
S
June 2008
December 2008
ED
November 2008
S
May 2009
ED
December 2008
S
June 2009
ED
S
June 2009
December 2009
ED
June 2009
S
September 2009
CP
ED
August 2009
October 2010
ED
ED
ED
ED
ED
October 2010
October 2010
January 2012
January 2102
January 2012
S
September 2009
ED
November 2009
S
January 2010
Exposure Draft Amendments to FRS 26 (IAS 36)
Amendment to FRS 20 (IFRS 2) 'Share-based payment - Group Cash-settled Sharebased Payment Transactions'
Amendment to FRS 26 (IAS 39) 'Financial Instruments: Recognition and
Measurement' Eligible Hedged Items
FRS 20_2
Amendment FRS 20 (IFRS 2) ‘Share-based payment – Group Cash-settled Sharebased Payment Transactions’.
Amendment FRS 20 (IFRS 2) ‘Share-based payment – Group Cash-settled Sharebased Payment Transactions’.
Improvements to Financial Reporting Standards 2008
FRED ‘Improvements to Financial Reporting Standards’
‘Improvements to Financial Reporting Standards’
FRS 29
Proposed Amendments to FRS 29 (IFRS 7) ‘Financial Instruments Disclosures’ –
Improvements to Financial Instruments Disclosures.
Amendments to FRS 29 ‘Improving Disclosures about Financial Instruments’
FRS 2, FRS 6, and FRS 28
Amendments to FRS 2 ‘Accounting for Subsidiary Undertakings’, FRS 6
‘Acquisitions and Mergers’, and FRS 28 ‘Corresponding Amounts’.
Amendments to FRS 2, FRS 6, and FRS 28
Improvements to Financial Reporting Standards 2009
FRED ‘Improvements to Financial Reporting Standards 2009’
‘Improvements to Financial Reporting Standards 2009’
UITF Abstract 42 and FRS 26
FRED: ‘Proposed Amendments to UITF Abstract 42 and FRS 26 (IAS 39)
‘Embedded Derivatives’.
Amendments to UITF Abstract 42 and FRS 26 (IAS 39) ‘Embedded Derivatives.
The Future of UK GAAP
Policy Proposal: The Future of UK GAAP
The Future of Financial Reporting – Part One: Explanation: FRED 43 Application
of Financial Reporting Standards & FRED 44 Financial Reporting for Mediumsized Entities
The Future of Financial Reporting – Part Two: Draft Financial Reporting Standards
The Future of Financial Reporting - Appendices
Application of Financial Reporting Requirements
Reduced Disclosure Framework
FRED The Financial Reporting Standard applicable in the UK and Republic of
Ireland
Amendments to UITF Abstract 42 and FRS 26 (IAS 39) ‘Embedded Derivatives.
FRS 25_2
FRED ‘Proposed Amendment to FRS 25 (IAS 32) ‘Financial Instruments:
Presentation’ - Classification of Rights Issues.
Amendment to FRS 25 (IAS 32) ‘Financial Instruments: Presentation’ Classification of Rights Issues
10
11
12
13
14
15
16
17
18
37
19
ED
S
June 2010
November 2010
ED
February 2011
S
July 2011
20
Improvements to Financial Reporting Standards 2010
FRED ‘Improvements to Financial Reporting Standards 2010’
‘Improvements to Financial Reporting Standards 2010’
FRS 29_2
FRED: Proposed Amendments to FRS 29 (IFRS 7) ‘Financial Instruments:
Disclosures’: Disclosures – Transfers of Financial Assets.
Amendments to FRS 29 (IFRS 7) ‘Financial Instruments: Disclosures’: Disclosures
– Transfers of Financial Assets.
Auditing Practices Board
21
ESRA
Exposure Draft ‘Ethical Standards for Reporting Accountants’.
Feedback on Responses to Consultation
Ethical Standards for Reporting Accountants
ISRE 2410
DP
FB
S
January 2006
2006
October 2006
ED
January 2007
FB
S
2007
July 2007
ED
May 2007
FB
S
February 2008
February 2008
DP
September 2010
FB
S
2011
March 2011
DP
December 2007
S
April 2008
Discussion of ISA 600 ‘The work of Related Auditors and Other Auditors in the
Audit of Group Financial Statements’.
ISA 600 (UK and Ireland)‘The work of Related Auditors and Other Auditors in the
Audit of Group Financial Statements’
ISA 700 (UK and Ireland)
DP
FB
ED
FB
S
December 2007
October 2008
September 2008
September 2008
March 2009
‘Auditor's Report: Time for Change?’
Feedback paper: ‘Auditor's Report: Time for change?’
ED of ISA 700 (UK and Ireland): ‘The Auditor's Report on Financial Statements’.
Feedback paper on ED
ISA 700 (UK and Ireland) ‘The Auditor's Report on Financial Statements’.
ISA 700 (UK and Ireland) Revised
ED
FB
September 2010
2010
ED of ISA 700 (UK and Ireland) ‘The Auditor's Report on Financial Statements’.
Feedback paper on ED
22
23
24
25
26
27
Exposure Draft: ISRE 2410 ‘Review of Interim Financial Information Performed by
the Independent Auditor of the Entity’.
Feedback on Responses
ISRE 2410 ‘Review of Interim Financial Information Performed by the Independent
Auditor of the Entity’.
SIR 5000
ED of SIR 5000 ‘Investment Reporting Standards Applicable to Public Reporting
Engagements on Financial Information Reconciliations’.
Feedback on responses
SIR 5000 ‘Investment Reporting Standards Applicable to Public Reporting
Engagements on Financial Information Reconciliations’.
SIR 2000
SIR 2000 'Investment Reporting Standards Applicable to Public Reporting
Engagements on Historical Financial Information’.
Feedback on responses
Revised SIR 2000 'Investment Reporting Standards Applicable to Public Reporting
Engagements on Historical Financial Information’.
ISA 600 (UK and Ireland)
38
S
February 2011
Amended ISA 700 (UK and Ireland) ‘The Auditor's Report on Financial
Statements’.
Ethical Standards for Auditors
Spring 07
October 2007
April 08
Review of Ethical Standards for Auditors
Amendments to the Ethical Standards
Feedback Paper on ED and Revised Ethical Standards.
28
ED
FB/
S
Ethical Standards for Auditors 2
29
ED
March 2009
FB
S
FB
S
March 2009
October 2009
October 2009
July 2010
DP
October 2008
FB
October 2008
March 2009
April 2009
October 2009
October 2009
30
ED
FB
S
ED of Revised Ethical Standards No. 1 ‘Integrity, Objectivity and Independence’,
No. 2 ‘Financial, Business, employment and Personal Relationships’, No. 3 ‘Long
Association with the Audit Engagement’, No. 4 ‘Fees, Remuneration and
Evaluation policies, Litigation, Gifts and Hospitality’, No. 5 ‘Non-audit Services
Provided to Audited Entities’.
Responses to ED
Revised Ethical Standard 3 ‘Long Association with the Audit Engagement’.
Feedback on Responses to March 2009 Consultation
Revised Ethical Standards No. 1 ‘Integrity, Objectivity and Independence’, No. 2
‘Financial, Business, employment and Personal Relationships’, No. 4 ‘Fees,
Remuneration and Evaluation policies, Litigation, Gifts and Hospitality’, No. 5
‘Non-audit Services Provided to Audited Entities’.
ISA Clarity project
Consultation
on
whether
UK
and
standards should be updated for the new (clarified) ISAs.
Responses to DP
APB announces intention to update ISAs (UK and Ireland)
ED of Clarified ISAs (UK and Ireland)
Feedback on responses to ED.
Clarified ISAs (UK and Ireland)
Irish
auditing
List of Abbreviations:
DP – Discussion Paper
ED – Exposure Draft
FB – Feedback paper
S –Standard
RS – Reporting Statement
FRS – Financial Reporting Standard
FRSSE – Financial Reporting Standards for Smaller Entities
FRED – Financial Reporting Exposure Draft
UITF - Urgent Issues Task Force
ESRA – Ethical Standards for Reporting Accountants
ISRE – International Standard on Review Engagements
SIR – Standard for Investment Reporting
ISA (UK and Ireland) – International Standard on Auditing adopted in UK and Ireland
39