Presentation to the Leinster Society of Certified Public

Accountants

Ulster Bank Building,George’s Quay, Dublin

26 October, 2006

Ian DrennanChief Executive

Overview

• Role/Goals of the Authority

• Experiences to date

• The 8th Directive

• Q&A

The Role of the Authority

• Four principal objects – set out in statute, viz:

– Supervision of the prescribed bodies;

– Advisory;

– Promotion;

– Financial statement review.

High Level Goals• To work with the profession towards the achievement of common

goals, whilst preserving the Authority’s independence.

• To provide independent assurance to the public that the profession is regulating itself to the requisite standard and that, where issues do arise, the public interest is being served and protected.

• Where this is not the case, to take appropriate action and act as a dissuasive influence against recurrence.

• Thereby enhancing public confidence in the profession and its outputs (including audit and financial reporting).

Context for the Authority’s Activities

• Statutory functions and Parliamentary accountability;

• Domestic factors contributing to the establishment of the Authority;

• Wider, and ongoing, financial reporting/auditing issues;

• Resultant damage to the public’s confidence in the profession and in the capital markets;

• The political response thereto, including:

– relevant EU legislative developments (including the revised 8th Directive);

– 3rd countries’ responses;

Context for the Authority’s Activities• The challenges and risks posed to preparers, auditors, users and

regulators by:

– the introduction of new accounting, auditing and ethical standards; and

– a shortage of experienced professionals;

• Requirement for balanced, proportionate regulation;

• Increasing resistance to regulation generally, with opponents citing cost, competitiveness and disproportionate impact on SMEs/SMPs as arguments for amendment/repeal.

Experiences to Date

• While it is still early days (given that the Authority was only established on a statutory footing in February), the Authority has:

– received a number of complaints from members of the public; and

– undertaken detailed reviews of a number of the prescribed bodies.

Experiences to DateComplaints

• Given that the Authority’s role is to supervise, rather than supplant, the prescribed bodies’ regulatory processes:

– where complaints received by the Authority have not, in the first instance, been addressed to the relevant body, complainants are advised to direct their complaints to the prescribed bodies;

– where complaints have been directed to the prescribed bodies, and the body’s internal process has not been exhausted, the Authority considers it appropriate to await the completion of that process;

– where complaints relate to the prescribed bodies’ processes, the Authority will examine same with a view to determining whether there is an issue of apparent non-compliance with the relevant body’s approved process and procedure.

Experiences to Date

Prescribed Body Reviews

– Reviews are wide ranging, covering, inter alia, bodies’ governance arrangements, regulatory processes, monitoring activities and admissions/licensing processes.

– Findings are confidential – the Authority may, however, issue a non-body specific summary of issues arising.

– Emphasis of reviews is on seeking to ensure that all of the prescribed bodies adhere to a common high standard of regulatory activity from which the public can derive comfort.

Experiences to Date

Prescribed Body Reviews (cont.)

– Results of prescribed body reviews, together with complaints received, will be factored into the Authority’s risk assessment and selection methodologies.

– The scope and frequency of future reviews will be determined having regard to a range of risk indicators and other relevant factors.

Initial Reviews• Initial reviews have four main areas of focus:

– governance and its impact on the regulation of members;

– systems for monitoring members in public practice;

– complaints handling, investigative, disciplinary and appeals procedures;

– licensing & registration of members.

Governance and its Impact on the Regulation of Members

• Seek to gain an understanding of the Corporate Governance of the body, in particular:

• organisational structure - reporting lines, responsibilities and accountabilities;

• link between the governing body and the Committees;

• Committees’ working methods and procedures;

• link between the Committees and the Quality Assurance and Secretariat functions.

• Reviews of Committees’ minutes and attendance at meetings as observers.

Review of Monitoring Processes• Examination of bodies’ procedures for monitoring members engaged

in audit:

– monitoring cycles and annual plans;

– firm/practitioner risk assessment and visit selection methodologies;

– monitoring approach, scope, emphasis, review programmes and file selection procedures;

– internal quality control procedures;

– grading criteria; and

– response and follow-up to unsatisfactory monitoring visits;

Review of Monitoring Processes

– assessment of the resourcing of the monitoring function, both human and financial ;

– ‘shadowing’ of bodies’ inspection staff on selected visits;

– members’ compliance with other obligations e.g. PII, CPD.

Complaints Handling &Disciplinary Procedures

• Examination of:

– complaints handling processes and procedures;

– disciplinary and appeals processes;

– policies regarding the publication of disciplinary or regulatory outcomes/sanctions;

• Detailed review of selected files.

• Assessment of resourcing of the function.

Licensing and Registration

• Gain an understanding of the procedures for issuance, renewal, suspension and revocation of licenses/authorisations to:

– allow members/member firms to engage in public practice; and

– allow members/member firms to engage in audit.

Other Work OngoingAdvisory

• Further to a request from the Minister for Trade & Commerce, the Authority is currently examining the issue of legal recognition of the term ‘accountant’. Authority has already advised the Minister of its view that, in principle, there is merit is some form of action being taken.

Approvals

• Currently examining requests for approvals re:

– Recognised Body status; and– amendments to certain prescribed bodies’ constitutions.

Financial Statement Review

• Authority currently in discussions with the Department of Enterprise, Trade & Employment regarding a possible role under the Transparency Directive.

Other Key Areas of Activity

• Membership of the International Forum of Independent Audit Regulators (IFIAR);

• Membership of the Company Law Review Group (CLRG);

• Representation at the Auditing Practices Board (APB);

• Representation at the Accounting Standards Board (ASB).

Impending Challenges• The revised EU 8th Company Law Directive, which must be

transposed by June 2008, will pose a number of challenges for:

– the Authority;

– its EU counterparts;

– the EU Commission;

– Member States; and

– the profession.

8th Directive –Fundamental Provisions

• A statutory audit is one required by EU law.

• Statutory audits shall only be carried out by auditors/audit firms approved for that purpose by the Member State requiring the audit.

• Each Member State shall designate competent authorities which are responsible for approving statutory auditors.

• Competent authorities for the above purpose may be professional associations, provided that they are subject to public oversight.

8th Directive –Fundamental Provisions

• Member States’ competent authorities may approve natural persons who satisfy the following requirements as statutory auditors:

– good repute;

– minimum educational qualifications;

– examination of professional competence;

– test of theoretical knowledge; and

– practical training.

Registration• Each Member State shall ensure that statutory auditors and audit firms

are entered in a public Register.

• Each auditor shall be identified in the Register by an individual number.

• The Register shall be held in electronic format and be electronically accessible to the public.

• The Register shall contain details of the competent authorities responsible for approval, quality assurance, investigations, discipline and public oversight.

Ethics, Independence & Confidentiality• Member States shall ensure that:

– all statutory auditors and audit firms are subject to principles of professional ethics covering, inter alia, integrity, objectivity, professional competence and due care;

– when carrying out statutory audits, the statutory auditor/audit firm is independent of the audited entity and is not involved in internal decision making;

– if the auditor’s independence is affected by threats, the auditor must apply safeguards in order to mitigate those threats;

– all threats and safeguards applied are documented by the auditor.

Auditing Standards & Reporting• Member States shall require statutory auditors and audit firms to carry

out audits in compliance with international auditing standards adopted by the Commission.

• Member States shall ensure that, in the case of statutory audits of groups of undertakings:

– the group auditor bears full responsibility for the group audit report; and

– the group auditor carries out a review and maintains documentation of their review of any audit work performed statutory auditors/firms and/or 3rd country auditors/firms for the purpose of the group audit.

• Documentation shall be sufficient to facilitate external review.

Quality Assurance

• Each Member State shall ensure that all statutory auditors are subject to a system of quality assurance which meets at least the following:

– QA system is organised in such a manner that it is independent of the reviewed auditors and audit firms and is subject to public oversight;

– funding of the QA system shall be secure and free from any possible undue influence by auditors/audit firms;

– QA system has adequate resources;

– persons carrying out QA reviews shall have appropriate professional education and relevant experience, combined with QA training;

Quality Assurance

– selection of reviewers for specific QA assignments shall be effected in accordance with an objective procedure and designed to ensure that there are no conflicts of interest;

– the scope of QA review, supported by adequate testing of selected audit files, shall include an assessment of:

• compliance with applicable auditing and independence standards;

• the quantity and quality of resources spent;

• the audit fees charged; and

• the internal quality control systems of the firm;

– QA reviews shall be the subject of a report, which shall contain the main conclusions of the review;

Quality Assurance

– QA reviews shall take place at least every six years (at least every three years in the case of auditors carrying out the audits of public interest entities);

– the overall results of the quality assurance system shall be published annually;

– recommendations arising from QA reviews shall be followed up by statutory auditors/audit firms within a reasonable period;

– where recommendations are not followed up, the statutory auditor shall be subject to a system of investigation and discipline.

Investigation and Penalties

• Member States shall ensure that there are effective systems of investigation and penalties to detect, correct and prevent inadequate execution of statutory audit.

• Member States shall provide for effective, proportionate and dissuasive penalties in respect of statutory auditors where statutory audits are not performed in conformity with the provisions adopted in the implementation of the Directive.

• Member States shall ensure that measures taken and penalties imposed on auditors are appropriately disclosed to the public.

Public Oversight

• Member States shall organise an effective system of public oversight.

• All statutory auditors and audit firms must be subject to public oversight.

• The system of public oversight shall be governed by non-practitioners who are knowledgeable in the areas relevant to statutory audit.

• Member States may, however, allow a minority of practitioners to be involved in the governance of public oversight systems.

Public Oversight• The system of public oversight shall have ultimate responsibility for

the oversight of:

– approval and registration of statutory auditors and audit firms;– adoption of standards on professional ethics, internal quality control of

audit firms and auditing; and– continuing education, quality assurance and investigative and disciplinary

systems.

• The public oversight system shall have the right, where necessary, to conduct investigations in relation to statutory auditors and the right to take appropriate action.

• The system of public oversight shall be transparent, including by publishing annual work programmes and activity reports.

Public Oversight

• The system of public oversight shall be adequately funded and its funding shall be secure and free from any undue influence by statutory auditors or audit firms.

• Member States shall ensure that the regulatory arrangements for public oversight systems permit effective co-operation at EU level in respect of Member States’ oversight activities.

International Aspects• Article 45 – Registration & Oversight of 3rd Country Auditors

• The competent authorities of each Member State shall register every 3rd country auditor and audit entity that provides an audit report concerning the annual accounts of a company incorporated outwith the EU whose transferable securities are admitted to trading on a regulated market of that Member State (except where the company is an issuer exclusively of debt securities, the denomination per unit of which is at least €50,000).

• Audit reports issued by 3rd country auditors that have not been registered shall have no legal effect (i.e. shall be invalid).

International Aspects

• Article 45 (cont.)

• However, a Member State may only register a 3rd country audit entity if, inter alia:

– it meets requirements which are equivalent to those laid down by the Directive relating to training and education etc.; and

– the audits of those companies concerned (i.e. listed in the Member State but incorporated elsewhere) are conducted in accordance with international auditing standards as adopted by the Commission and with the independence requirements laid down by the Directive (or equivalent standards and requirements).

International Aspects• Article 45 (cont.)

• Member States shall subject registered 3rd country auditors and audit entities to their systems of oversight, quality assurance, investigation and discipline.

International Aspects• Article 46 – Derogation in the case of equivalence

• Member States may disapply or modify the requirements in Articles 45(1) and 45(3), i.e.:

– requirement to register 3rd country auditors (45(1)); and

– requirement to subject registered 3rd country auditors to their systems of oversight, quality assurance, investigation and discipline (45(3));

only if the 3rd country auditors/audit entities are subject to systems of public oversight, quality assurance, investigations and discipline that meet requirements equivalent to those provided for by the Directive.

International Aspects

• Article 46 (cont)

• Equivalence (regarding public oversight, quality assurance, investigations and discipline) will be assessed by the Commission, in co-operation with Member States.

• Pending a decision by the Commission, Member States may:

– assess the equivalence referred to above; or

– rely on the assessments carried out by other Member States.

• Member States may only modify or disapply the requirements of Articles 45(1) and 45(3) on the basis of reciprocity.

Third Country Auditors• Authority has, at the request of the EC Commission and with the assistance

of the Irish Stock Exchange, ascertained that there are 854 companies listed on the ISE that are incorporated in 3rd countries. These are analysed in the table below, with the number of identified audit firms shown to the right:

Bahamas

Bermuda

British Virgin Islands

Canada

Cayman Islands

Guernsey

Isle of Man

Jersey

Malaysia

Malta

Mauritus

Netherlands Antilles

USA

Total

9

65

46

1

537

28

7

148

1

2

1

3

6

854

4

7

10

1

16

3

2

4

1

1

1

3

5

58

Other Provisions of Interest

• Article 37 - Dismissal of Auditors

• Member States shall ensure that statutory auditors / audit firms may be dismissed only where there are proper grounds.

• Divergence of opinion on accounting treatments or audit procedures shall not constitute proper grounds for dismissal.

• Member States shall ensure that the audited entity and the statutory auditor inform the authority(ies) responsible for public oversight of the dismissal and give an adequate explanation of the reasons therefor.

Other Provisions of Interest

• Article 41 – Audit Committees

• Member States shall provide that all ‘public interest entities’ have an Audit Committee. Each Member State shall determine whether ACs are to be comprised of:

– non-executive directors; and/or

– members appointed at the AGM.

• At least one member of the AC shall be independent and have competence in accounting and/or auditing.

Other Provisions of Interest

• Article 41 (cont)

• The AC shall, inter alia:

– monitor the financial reporting process;

– monitor the effectiveness of the company’s internal control, internal audit (where applicable) and risk management systems;

– monitor the statutory audit of the statutory accounts; and

– Review and monitor the independence of the statutory auditor, and in particular the provision of non-audit services.

• Certain exemptions provided for (e.g. subsidiaries, UCITs, securitisation vehicles etc.)

Other Provisions of Interest

• Article 41 (cont)

• Public interest entities:

– transferable securities are admitted to trading on a regulated market;

– credit institutions;

– insurance undertakings;

– other entities designated by Member States e.g. of significant public relevance due to the nature of their business, their size and/or number of employees.

Other Provisions of Interest• Article 31 - Auditors’ Liability

• Article 31 provides that the Commission will, prior to 1 January 2007, present a report on the impact of current national rules on auditors’ liability on EU capital markets

• Commission has commissioned a study from LE

• Report recently published by the Commission.

Contacts & Further Information

IAASA,

2nd Floor, Willow House,

Millennium Park,

Naas,

Co. Kildare.

Tel: +353 (0)45 983600 Fax: +353 (0)45 983601

Email: info@iaasa.ie

Web: www.iaasa.ie / www.iaasa.eu

Thank You

Questions?