Alliott Group
Amsterdam
7 May 2010
EU Adoption of ISAs and Other Related Matters
Philip Johnson
FEE Deputy President
Standing for trust and integrity
Agenda
 A little about FEE
 The Accountancy Profession at a Crossroads”
 Current position within the European Commission
 ISA Implementation challenges
 Assurance services other than Audit
 Impact of the Financial Crisis on Financial Reporting
 eXtensible Business Reporting Language (XBRL)
 Ethics and Independence
 Audit Regulation in Europe
 Assurance on Corporate Governance Statements
 Thoughts on the implications for our profession
2
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Federating Member Bodies
 43 professional institutes of accountants
 32 European countries, including all 27 EU
 > 500.000 professional accountants
3
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FEE’s Role: Representing the Profession
and Adding Value to Members
Catalyst in
Europe
4
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Areas of activity
Financial
Reporting
Accounting
Insurance
Banks
5
Auditing
Sustainability
Ethics
Qualification
and Market
Access
Company Law
Corporate
Governance
Public Sector
SMEs-SMPs
Taxation
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“The Accountancy Profession at
a Crossroads”
6
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The accountancy profession at a
crossroads
Developments
in Corporate
Governance
Public
Oversight of the
Profession
Adoption/
Implementation
of clarified ISAs
Increasing
cross border
activities
Helping clients
in areas like
Sustainability
Changes in
financial
reporting
Developments
regarding
services other
than audit
Changes in
Ethics and
Independence
Extended use
of XBRL
7
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Recent messages from the
European Commission re
Auditing, Financial Reporting
etc.
8
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Recent Messages from the European
Commission
 Want to reduce burden on SMEs
 Real difficulty is “how”
 Recognition that SMEs are fundamentally
important to the economy so need to grow and
develop the sector (97% of companies in
Europe)
 Need to reflect on what changes, if any, are
needed
9
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Recent Messages from the European
Commission
 Financial Reporting
 Micro entities
• Member State option
• Not about eliminating the accounting rules
• Parliament voted for revised proposals – would like to
progress during Spanish Presidency
 Other SMEs
• Revision of 4th and 7th Directive
• IFRS for SMEs
• “Evolution” not “Revolution”
10
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Recent Messages from the European
Commission
 Financial Reporting (cont)
 Listed SMEs
• Should EC provide different rules?
• Should they have full IFRS or something else?
• What can be done in areas such as Prospectuses
and other reports to shareholders?
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Recent Messages from the European
Commission
 Auditing
 Green paper – to be issued before end of September
2010
• Structure of the market (concentration and choice)
• ISA adoption
• Role and governance of the auditors
• Audit for SMEs (do we need to simplify audit for SMEs and
SMPs?)
• International co-operation
• Supervision and inspection of audit firms across Europe
• Ethical matters like conflicts of interest
• etc., etc.
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Implementation of ISAs
Challenges for the Firms/Profession and
Applicability of ISAs to Audits of SMEs
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Main Challenge
Due to current thinking within the European
Commission, main challenge will be
Association/Network firms working with
different auditing standards unless direction
from the centre or mutual co-operation
amongst the constituent firms within an
Association/Network
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Countries which have decided to
implement Clarified ISAs (April 2010)
Countries
Status
#
Belgium (2012/2014), Bulgaria, Cyprus, Czech
Republic, Finland, Hungary, Ireland, Latvia, Malta,
Netherlands, Norway, Slovak Republic, Slovenia,
Sweden, UK
Yes
15 52
Austria, France, Luxembourg, Poland, Portugal,
Romania, Switzerland
No,
awaiting
EC
7
24
Denmark, Estonia, Germany, Greece, Italy, Lithuania,
Spain
Unclear
7
24
Total
15
%
29 100
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ISA Implementation Challenges for
the Firms/Profession
 Need for considerable human and financial
investment in first years:
 Translation of ISAs into local language
 New or updated audit approach policy manuals and
methodology
 New or updated audit software
 New or updated training material and training efforts
 Coordination with and buy-in from stakeholders
(preparers, regulators, inspection bodies, software
providers, training consortia, professional media, etc.)
 Involvement of professional bodies (essential)
16
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Big Audit Firms
 Have implemented clarified ISAs by IAASB
effective date (2010 year-ends)
 Were already largely ISA compliant
 Can look after themselves for implementation
 Issues:
 Globally consistent approach
 Local pluses and potential minuses (local laws and
regulations)
 Different approach for different industries and size of
entities
17
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Smaller Audit Firms
 Smaller firms need more help as it is a greater challenge
for them
 Not all countries are starting from the same position re
standards currently being used. Much to do in many
countries
 Issues:
 Considerable time required to implement (start now)
 Need help from professional accountancy bodies (FEE
Member Bodies)
 FEE Member Bodies seek help from IAASB, FEE, etc.
 IAASB to produce implementation or support material (video
modules and slides for certain ISAs) – will it focus on SMEs
18
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FEE ISA Implementation Task Force
 Set up to consider work required on implementation of
clarified ISAs in 2010 and beyond
 Includes representatives of IFAC SMP Committee,
EGIAN, World Bank, etc.
 Established current ISA implementation status and
approaches across Europe (survey)
 Based on the results of the survey, still to determine what
further work to be undertaken
 on implementation framework
 on communications
 Focusing on sharing information to help FEE Member
Bodies and SMPs wherever possible
 Considering involvement with audit software providers
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Applicability of ISAs for Audits of
SMEs (1)
Concerns of SMPs
 Cost of audit will increase using clarified ISAs
 Concerns about scope to apply professional
judgement to determine audit approach in line with
nature, size, risk and complexity of audited entity
 Concerns about excessive audit documentation
requirements
 Expectations of public oversight bodies (POBs)
upon quality assurance reviews or inspections are
unclear
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Applicability of ISAs for Audits of
SMEs (2)
Response:
 Need to re-engineer the audit to benefit from work on internal
control environment
 Open debate of FEE with IAASB, POBs, EGAOB and European
Commission on concerns and possible resolution
 FEE Policy Statement on ISAs produced
 IAASB Staff Q&A on proportionality of ISAs in SME context
issued
 IAASB implementation modules rolled out
 Update of APB Practice Note 26 on Guidance on Smaller Entity
Audit Documentation completed
 IFAC SMP Committee Guide on Using ISAs in the audit of
SMEs being reviewed – due end of 2010
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Output of the Clarity Project
 36 Clarified ISAs and ISQC 1
 16 revised and redrafted ISAs; 1 new ISA
 Remaining ISAs and ISQC 1 redrafted
 Revisions include new requirements and guidance
that aim to improve practice in a variety of respects
 Redrafts include requirements drawn from existing
‘grey text’
 Effective date: 2010 year end audits
 Moratorium: no new ISAs effective before 2011
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36 Clarified ISAs
ISAs
Risk Assessment
and Response to
Assessed Risks
ISA 200
ISA 300
ISA 500
ISA 600
ISA 700
ISA 800
ISA 210
ISA 315
ISA 501
ISA 610
ISA 705
ISA 805
ISA 220
ISA 320
ISA 505
ISA 620
ISA 706
ISA 810
ISA 230
ISA 330
ISA 510
ISA 710
ISA 240
ISA 402
ISA 520
ISA 720
ISA 250
ISA 450
ISA 530
Audit
Evidence
ISA 260
ISA 540
ISA 265
ISA 550
Using Work
of Others
Specialized
Areas
ISA 560
1 New
ISA 570
16 Revised and Redrafted
ISA 580
23
Audit
Conclusions
and Reporting
General
Principles and
Responsibilities
19 Redrafted only
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Redrafted and Revised ISAs
Objectives and overarching
responsibilities
Risk assessment and
evidence gathering in
riskier areas
Quality of audit
evidence, and basis for
reliance on others
Auditor communications
ISA 200 – Overall Objectives
and Conduct of ISA Audit
ISA 402 – Service
Organizations
ISA 580 – Written
Representations
ISA 260 – Communication with
TCWG
ISA 320 - Materiality
ISA 505 – External
Confirmations
ISA 600 – Group Audits
ISA 265 – Communicating
Deficiencies in I/C
ISA 450 – Evaluation of
Misstatements
ISA 540 – Estimates and
Fair Values
ISA 620 – Using Work
of Experts
ISA 705 - Modifications
ISA 550 – Related Parties
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ISA 706 – EOM/Other Matter
Paragraphs
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Main changes in Clarified ISAs
 The split between objectives, requirements and
guidance (AM) makes the ISA much clearer
 Much more risk-based, so much more focus when
performing an audit on understanding the entity, risk
assessment and internal controls than would be the
case if substantive audit procedures used in all areas
 Heightened attention to fraud
 Use of professional judgement in audit, reporting and
documentation continues to be important
 Focus on significant matters, risks, judgements and
documentation cannot be stressed enough
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There is an opportunity to promote the
benefits of the clarified ISAs
26
More rigorous approach to the
audit of groups
Put related party transactions
nearer the heart of the audit
More robust approach to
management override
More principles based approach
through use of objectives
Greater clarity as to what is
expected of auditors
Relevant to responding to the
financial crisis including ISA 450
on evaluation of misstatements
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Some key messages that have
emerged from UK implementation
The DVDs issued by
the IAASB are useful
Strong resistance to
dual track approach
for big and small
audits
Need to sell
the success of
clarified ISAs
Involvement of
engagement partner
is key to audit
effectiveness and
Learning
efficiency
providers want to
know why the
changes were made
and not just what the
changes are
27
Effective
implementation
needs sufficient
time and effort
Recognition that
clarified ISAs are
easy to understand
Too early to gauge
success of current
implementation
Enthusiasm needs to
be encouraged
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Issues that became apparent after 2005
Implementation of Risk ISAs in UK
Many firms
were struggling with
the risk ISAs
Successful
implementation takes
several years
28
Quality of software is key
Support software
with learning
is important
Smaller firms
need special support
Partner engagement is
critical
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Impact of Use of Audit
Exemption Thresholds
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Use of Audit Exemptions for Limited
Liability Companies in the EU, Norway and
Switzerland
Countries
%
Maximum or near maximum thresholds:
Balance sheet total: €4.400.000
Net turnover: €8.800.000
(Austria, Belgium, Germany, Ireland, Italy, Luxembourg,
the Netherlands, Romania, Slovenia, Switzerland1, United
Kingdom)
11
38
Balance sheet total: between € 2.500.000 and 3.000.000
Net turnover: between € 5.000.000 and 5.700.000
(Greece, Poland and Spain)
3
10
Balance sheet total: between € 1.000.000 and 1.800.000
Net turnover: between € 2.000.000 and 3.100.000
(Czech Republic, France (except SA), Lithuania and
Portugal)
3 (1)
10
1 Introduction or increase in 2007, 2008 or 2009
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Use of Audit Exemptions for Limited
Liability Companies in the EU, Norway and
Switzerland
Countries
%
Balance sheet total: between € 500.000 and 900.000
Net turnover: between € 1.000.000 and 1.800.000
(Estonia1,4 and Slovak Republic1)
2
8
Balance sheet total: between € 100.000 and 500.000
Net turnover: between 200.000 and 1.000.000
(Bulgaria, Denmark1,4, Finland2, Hungary1 and Latvia1)
5
17
Balance sheet total/ net turnover: €0 (Cyprus3, France
(SA), Norway, Malta3, Sweden4)
5
17
29
100
1 Introduction or increase in 2007, 2008 or 2009
2 Decrease in 2007
3 For tax purpose
4 Increase in 2010 (final or expected)
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Impact of use of Audit Exemption
Thresholds
 Trend to increase audit exemption thresholds in
EU
 97% of all EU audits are SME audits
 The market for statutory audit is shrinking (95%
are below EU audit threshold)
 Substitution by voluntary audits is not evident
 However, the economy continues to need comfort
that the financial performance of companies is
fairly presented
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Reaction to more companies not
requiring an audit
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Assurance services other than audit
Issues:
Responses:
 “An audit is an audit” must be
 Development of / changes to
preserved (brand protection)
 Increase in audit exemption
thresholds
 More regulatory pressure
 Clarified ISA audit more
demanding and more costly
 Desire by profession to
provide something to fill the
hole
 ………
34
assurance services other than
audit
 Addressed on national, FEE &
IAASB level
 Divergent views in different
countries
 Desire to arrive at positive audit
opinion with less work – not
possible without confusion or
brand damage
 FEE survey July 2009
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Assurance initiatives other than audit
in some countries
 Consideration of or proposals for non audit assurance service
for (certain) smaller entities in Denmark, Finland and Malta
 Mandatory statutory review for ‘‘SMEs’’ in Estonia and
Switzerland
 Presentation or compilation engagements with certain
assurance in France and Germany
 Accountant (not auditor) report for small charities & pension
schemes in Ireland
 Continous integrated reasonable assurance by Collegio
Sindacale in Italy
 Limited assurance based on review plus substantive
procedures in UK (ICAEW)
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Assurance services other than audit:
conclusions
 Fragmentation a major issue in Europe and beyond
if no global standard
 Call by FEE for Member States and National
Institutes to exercise constraint
 IAASB encouraged to speed up work on review
engagements- exposure draft late 2010
36
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Impact of the Financial Crisis on
Financial Reporting
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Impact of the financial crisis on
reporting
 Was IFRS to blame or did it identify the problem?
 Political pressure to achieve a ‘‘Level Playing
Field’’
 Revision of Standards accelerated (IAS 39 ->
IFRS 9)
 Convergence to one single set of global
standards called for but slow progress
 Regulatory vs financial reporting (dynamic
provisioning)
 Role of Europe and EC
38
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Changes initiated by EC
Fourth and Seventh Directives
 Member State option to exempt micro-entities
 Complete Overhaul of the Fourth and Seventh
Directives?
 IFRS for SMEs:
 Debate goes on – EC not clear in its view
 Large differences between Member States on
intended use
 European Parliament – in the past against it but
what now? A wait and see policy !
39
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eXtensible Business Reporting
Language (XBRL)
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eXtensible Business Reporting
Language (XBRL)
 Allowing or mandating filing of audited FS and / or tax filings
under XBRL becomes more and more common
 IAASB project proposal to develop
 Pronouncement on expected auditor work efforts and
implications on his reporting if XBRL data filing with FS or if
only XBRL data filed
 FEE XBRL Task Force has prepared a FEE Policy Statement to
educate the accountancy profession and third parties on the
use of XBRL
 Explosion in available literature shows increased activity around
world
 Profession needs to engage now – increased demand for SMP
services
41
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Ethics & Independence
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Ethics & Independence
 Principles: covered in Articles 21 & 22 of SAD
 EC recommendation on independence (2002) still
applicable
 Revised IESBA Code of Ethics (July 2009), effective 1
January 2011, significantly strengthens the
independence requirements for PIE audits, non-PIE
audits and other assurance services
 Changes re key audit partner, partner rotation, internal
audit services, tax services, relative size of fees,
contingent fees
 EU MS currently have wide variety of independence
principles and/or requirements based on (old) IFAC
code – need for EC Recommendation
43
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Audit Regulation in Europe
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Audit Regulation in Europe
 Basis for European regulation on auditing: Statutory Audit






45
Directive (SAD) (May 2006)
For implementation in EU Member States (MS) by July
2008
As at 1 February 2010; 2 EU MS had not yet implemented
the SAD: Ireland and Spain
They hope to implement in 2010; the European
Commission (EC) has taken them to the European Court
of Justice
Norway will implement as well
The EC has not yet checked the content of the national
transposition of SAD
Significant number of countries are still executing the
changes of the SAD in their MS
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EC Recommendation on Quality
Assurance
 Guidance for implementing independent external
quality assurance systems for statutory auditors
and audit firms conducting an audit of Public
Interest Entities (PIEs)
 No detailed guidance for external quality assurance
systems for statutory auditors and audit firms
auditing entities other than PIEs
 Issued 6 May 2008
 EU MS inform EC about actions taken
 Need for mutual recognition of POBs going forward
46
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EC Recommendation on limitation of
liability
 Guidance for limitation of civil liability of statutory
auditors and audit firms auditing public interest
entities
 No limitation for intentional breach of duties
 Limitation against company and third parties
 Issued 6 June 2008
 Important for cross border activities
 MS inform EC about actions taken by 5 June 2010
 No political appetite to move this forward at present
time
47
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EC Decision on Exchange of Working
Papers
 EC adequacy decision re Article 47 SAD for Canada,






48
Japan and Switzerland, (Australia in pipeline)
Based on cooperation and exchange principle
US PCAOB not included
Current EC prohibition on US PCAOB access to EU
audit firm or EU MS documents
Bill pending in US Congress to change Sarbanes-Oxley
Act to make exchange of documents possible
Mutual reliance between EU POBs & US PCAOB is off
agenda at moment
Existence of PCAOB currently being challenged !!
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Assurance on Corporate
Governance Statements for
Listed Entities
49
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The Auditor and Corporate
Governance in European Legislation
 The 4th and 7th EU Accounting Directives (2006/46/EC)
were amended in June 2006
 Article 46a now requires disclosure of information about listed
company practices in a “corporate governance statement”
(CGS) in the annual report or outside the annual report
 Role for the statutory auditor depending on whether the CGS is
or is not included in the annual report
• Minimum requirement: production check versus consistency
check
 Measures to be transposed into national legislation by 5
September 2008; a few EU Member States are late !!
50
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Elements CGS
 4th & 7th EU Accounting Directives: disclosure of 6
elements in CGS for listed entities:
1. Reference to corporate governance code (CGC) and
practices applied
2. CGC: comply or explain approach
3. Description of main features of internal control and risk
management system for financial reporting process
4. Take-over bid information (2004/25/EC)
5. Operation shareholder meeting, key powers and description
shareholders rights
6. Composition and operation of administrative management
and supervisory bodies and their committees
51
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FEE Discussion Paper on Assurance
on CGS
 Main features:
 Outlines key elements of CG codes and legal requirements
in Europe;
 Summarises main features of existing CG reporting and
2006 EU changes on CGS;
 Explains potential auditor involvement with elements CGS
as well as required involvement based on IAASB material;
 FEE’s views on potential maximum involvement of the
auditor with elements of CGS; and
 Practical examples of auditors’ assurance reports on their
involvement
52
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Examples of Potential Maximum Level
of Auditors’ Involvement
CGS example
Auditors’ involvement
The Board is effective
None
Division of responsibilities
between Chairman and CEO
Factual finding based on
agreed upon procedures
The Board maintains a sound Limited assurance
system of internal control and
risk management
Disclosure of remuneration of Reasonable assurance
individual directors
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“The Accountancy Profession at
a Crossroads”
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Some messages from the FEE
SMP/SME Conference in Venice
 There will be more regulation but there is a
desire to get it right first time
 Profession is changing and our services to
SMEs will change
 Clients want to pay for expertise and
experience
 Audit is a diminishing market but other services
will stand in its place
55
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Messages from clients
(raised at the Venice conference)
 Improve your knowledge of the business
 More focus on the business and less on figures
 SMEs want support from SMPs to help them
develop their businesses
 Wide range of services to be provided not just
audit (but will regulators allow it?)
 Prepared to pay more for added value services
but not necessarily for audit
56
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The accountancy profession at a
crossroads
Developments
in Corporate
Governance
Public
Oversight of the
Profession
Adoption/
Implementation
of clarified ISAs
Increasing
cross border
activities
Helping clients
in areas like
Sustainability
Changes in
financial
reporting
Developments
regarding
services other
than audit
Changes in
Ethics and
Independence
Extended use
of XBRL
57
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Thoughts on the implications of
changes for the Auditing
Profession
Questions that need to be answered if we are to
prosper in the future
58
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Implications for the Profession
 Will there be convergence of Standards globally –




59
Auditing, Ethical, Financial Reporting? If not, what
will be the implications?
How will the Regulators finally react to the Financial
Crisis? More regulation or better regulation?
What will the emerging markets of China, India,
Russia and Brazil adopt as their Standards and how
will this impact on us? Some already moving to IFRS
and ISAs
What will be the impact of XBRL be on financial
reporting and auditing?
Are we well placed to lead on Sustainability?
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Implications for the Profession
 In Europe :
 Will the profession across parts of Europe lose credibility if
ISAs are not adopted by the EC
 Will we have a two track profession – auditors and non-auditors
and/or large firms and small firms working with different
auditing standards ?
 How will we train our people (and, as a consequence, those
who go into industry and commerce)?
 How can we attract and retain the best people?
 If, globally, we don’t have an audit for the vast majority
of companies what will the market want in its place (if
anything) and are we equipped to provide it?
60
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There is a big opportunity
(if we seize it)
as well as a big challenge
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Discussion and Questions
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