0902 cjw ICSA FINAL submission to ICAEW Audit Firm Gov Code Feb 09

Description

28 February 2009 Submitted by email to 16 Park Crescent [e-mail] London W1B 1AH [e-mail] Tel: [phone] Fax: [phone] [e-mail] Dear Mr Hodgkinson ICSA response to the ICAEW consultation document on the Audit Firm Governance The Institute of Chartered Secretaries and Administrators (ICSA) is the professional body that qualifies chartered secretaries. Many of our members are company secretaries in medium and large PLCs and a project which aims to promote the confidence in, and choice amongst, firms which audit public interest entities, is of interest to them. We are therefore pleased to respond to the consultation in general terms and appreciate the extension in time to respond. The majority of commentators support any project or proposal which seeks to: a) Increase market choice; b) Avoid one of “the big four” from exiting the market place; and c) Improve audit quality and risk management. As a result the initial reaction is one of support for an Audit Firm Governance Code for audit firms of public interest entities, similar to that of the Combined Code for listed companies. However, upon further examination there are reservations as to how this can be achieved in reality. Some commentators have opined that the only action that would safeguard sufficient competition and avoid the anti-competitive risk of a big firm failing would be for the OFT or FRC to insist on ...

Informations

• Publié par: Eftou
• Nombre de lectures: 90
• Langue: English

Extrait

Page 1 of 4

The Institute of Chartered Secretaries and Administrators

Founded 1891. Patron Her Majesty The Queen

16 Park Crescent

London W1B 1AH

Tel: [phone]

Fax: [phone]

[e-mail]

28 February 2009

Submitted by email to

[e-mail]

[e-mail]

Dear Mr Hodgkinson

ICSA response to the ICAEW consultation document on the Audit Firm Governance

The Institute of Chartered Secretaries and Administrators (ICSA) is the professional body that

qualifies chartered secretaries.

Many of our members are company secretaries in medium and

large PLCs and a project which aims to promote the confidence in, and choice amongst, firms

which audit public interest entities, is of interest to them.

We are therefore pleased to respond

to the consultation in general terms and appreciate the extension in time to respond.

The majority of commentators support any project or proposal which seeks to:

a) Increase market choice;

b) Avoid one of “the big four” from exiting the market place; and

c) Improve audit quality and risk management.

As a result the initial reaction is one of support for an Audit Firm Governance Code for audit

firms of public interest entities, similar to that of the Combined Code for listed companies.

However, upon further examination there are reservations as to how this can be achieved in

reality.

Some commentators have opined that the only action that would safeguard sufficient

competition and avoid the anti-competitive risk of a big firm failing would be for the OFT or FRC

to insist on the breaking up of the largest accountancy firms on the grounds that their audit

market shares are too close to the margin of acceptability.

If a large firm were then to fail (as

we have seen with the current banking crisis no company is “too big to fail”); it would be

preferable if there were 5 or 6 remaining instead of only 3.

Comments on the questions:

Stakeholders

1. Which groups of stakeholders do you think the Audit Firm Governance Code should primarily serve and in

what ways, if any do they have differing interests?

The underlying issue is to ensure transparency in order to avoid regulation and one way of

achieving this is to follow a Code.

Corporate Governance codes have been introduced to

protect shareholder interests when there is a separation of ownership and control but codes do

benefit other stakeholders.

As few audit firms have separated owners and controllers, ICAEW

have identified other stakeholders to include shareholders in, and directors of, public interest

entities that are audited by firms plus their lenders, creditors, insurers and employees.

The

primary beneficiaries identified by the ICAEW – shareholders and directors – would benefit as

their engagement with auditors would increase and in executing their audit committee and

directors duties when evaluating, appointing and re-appointing audit firms. However, as

commented in the ICSA consultation response to proposed changes to The Smith Guidance

1

1

Proposed changes to the guidance on audit committees (The Smith Guidance)

http://www.frc.org.uk/corporate/review_smith_guidance.cfm

Page 2 of 4

The Institute of Chartered Secretaries and Administrators

Founded 1891. Patron Her Majesty The Queen

s4.22, concerning the disclosures to shareholders of the audit firm review process, it was

agreed that audit committees should review the aspects contained within 4.22, but there were

reservations as to whether these should be reported to shareholders.

Therefore, if the code

encourages increased shareholder engagement with boards/ audit committees and auditors,

supporting evidence may be expected from both auditors and boards, especially if boards/ audit

committees are also relying on code compliance claims by auditors in order to aid the discharge

of their own duties.

This could be seen as a beneficial monitoring mechanism to avoid box

ticking exercises being relied upon, or possibly an example of differing interests between

shareholders and boards.

Risk management

2. What approach should a Combined Code-style Audit Firm Governance Code adopt to risk management and

internal control?

3. To what extent do the firms face unique issues in discussing their principal litigation and claims risks without

causing damage to the sustainability of the firm?

4. Do you agree that the Audit Firm Governance Code should focus on risk management and internal control of

the firm as a whole including its non-audit business and, if not, what alternatives would you propose?

Effective management and control are critical to the success and sustainability of every

business, including audit firms.

However, the two factors identified by ICAEW and their effects:

that of releasing information not already in the market place and stakeholders‟ interest in all

risks which affect firms, require careful attention when applying listed company experience of

risk management and disclosure to audit firms. Given the issues surrounding these factors, any

such Code should recognise that audit firms (generally) have a different structure to companies

and thus reflect this fact; however, a code can still draw on the Combined code attributes such

as clear objectives, be principles based, use a “comply and explain” approach and look to cover

risk management and control of the whole firm including its non-audit business. In addition, a

code should not duplicate existing regulations and requirements applicable to audit firms, but

should be consistent and compliment these.

International Structures

5. In the case of a UK firm that is part of a regional or international structure, should the Audit Firm Governance

Code specify the level at which it is applicable or should the firm be given some discretion to determine the

level at which it applies the Code, explaining why this level has been chosen?

6. Do you think that the Audit Firm Governance Code should contain code principles and/or code provisions

covering an audit firm‟s dependence on, and exposure to, the risks of other network members and how it

ensures consistent quality and application of auditing standards?

Given that any code should support the “comply and explain” ethos with as much emphasis on

the latter as the former, it might be seen to be more relevant to stakeholders to receive a well

set out explanation as to why a particular level was chosen, rather that dictate a mandatory

level.

It would seem reasonable to include a provision as described in question 6, as this might

be useful in highlighting risks which could affect sustainability and more importantly how they

are dealt with.

Should there be issues concerning such information being detrimental to

confidentiality/ commerciality then this could be explained.

Governance Structures

7. In principle, do you think the Audit Firm Governance Code should support the appointment of independent

non-executives by the firms and, if so, what might it say on the number or proportion of non-executives and

their position, role and responsibilities in a firm‟s governance structure?

8. Other than matters related to auditor independence, are there any barriers, regulatory or otherwise, to the

appointment of independent non-executives to firms?

9. What other governance structures and models are there that provide for independent oversight which might

be considered by the Audit Firm Governance Working Group?

It is a well acknowledged fact that non executive directors act as part of the board, in the

interests of the entity, and not as representatives of any particular stakeholder or interest group.

However, larger audit firms generally have a two-tier governance structure. Some firms could

claim that their current governance structures already reflect the principles of the Combined

Code because the majority of the partners performing oversight roles and participating in audit,

remuneration or nomination committees, are not members of the executive management board.

Thus the need for non-executive independent directors could be questioned by some firms

Page 3 of 4

The Institute of Chartered Secretaries and Administrators

Founded 1891. Patron Her Majesty The Queen

given that the majority are ultimately private businesses and most partners.

However it is also

acknowledged that independent non-executives role might include oversight of general

governance and public interest matters and ensure transparency. There is also an argument

that other regulatory bodies perform a similar role and appointment of non-executive directors

would be overkill.

There is also the issue of personal liability. It would appear that there is an

argument for supporting the appointment of non-executive directors. However, consideration

needs to given to how this would work in practice, whether a proportion should be

recommended or discretion given, and that the work doesn‟t duplicate existing systems and

regulations.

It is important that the appointment of non-executive directors adds value and

actually improves risk management, rather than merely appearing to further such matters.

Scope of firms to be covered

10. In order to determine which firms the Audit Firm Governance Code applies to, should the definition of a

public interest entity be based upon the narrower listed company market definition used for transparency

reporting purposes or the wider definition sued by the AIU or some other definition?

11. Do you think that a distinction should be made between firms that would be required to apply the Audit Firm

Governance Code and firms that would be encouraged to apply it on a voluntary basis and, if so, where

should that distinction be drawn?

The narrower listed company market definition covered listed entities on the Main Market of the

London Stock Exchange and excludes companies listed on AIM. However, the AIU‟s definition

includes the above, plus AIM, charities, pension schemes, unquoted large entities plus others.

Aligning the code with the narrower definition would have the advantage of simplicity and

consistency and not create a further classification for audit firms. There is also

acknowledgement that perhaps on cost benefit grounds, mandatory compliance with a code

should only apply to those with a certain number of public interest entity clients and or for clients

over a certain size. In addition, new market entrants should not be discouraged from supplying

services to public interest entities. There are some supporters for a wider definition as

increasingly investments are held in non-quoted companies and they also wish to rely on a high

standard of governance. However, there is the counter argument that firms not required to

follow the code could always be encouraged to do so on a voluntary basis, as some AIM

companies do with the combined code (as far as they are able).

Implementation and monitoring

12. Based on the assumption that the comply or explain approach will apply, to what extent do you think that the

implementation of the Audit Firm Governance Code should be „left to the market‟ because owners of the

firms and shareholders and directors of listed companies can be relied upon to ensure that the firms apply

the Code and make appropriate explanations of non-compliance?

13. What need, if any, do you think there will be for:

a. Audit regulations to require the firms to make comply or explain disclosures in relation to the Audit

Firm Governance Code?

b. A regulatory or other body to monitor and to check either compliance with the Audit Firm

Governance Code or the appropriateness of explanations of non-compliance

c. Involvement of auditors appointed by the firms?

14. Can you suggest any potential deregulatory measures to eliminate possible duplication that could be linked

to the implementation of the Audit Firm Governance Code?

Best practice “comply or explain” governance codes are generally seen as an efficient market

based alternative to regulation.

When considering monitoring and implementation of any

governance code the respective roles of regulators and market participants are important and

duplication of effort needs to be prevented. The audit quality monitoring work of the AIU and

Audit Firm Governance Code could be seen as complementary.

It has been opined that it is the combination of three forms of enforcement (FSA, shareholders

and auditors) that make the Combined Code successful.

It is questionable whether leaving

monitoring to market participants is sufficient yet there may be a justified reluctance in

designating a separate monitoring group to review implementation.

Although duplication needs

to be prevented, the monitoring of implementation probably requires a mix of approaches to

ensure the success of any such code.

Page 4 of 4

The Institute of Chartered Secretaries and Administrators

Founded 1891. Patron Her Majesty The Queen

Reporting and communication

15. What measures should be taken in relation to how and where the firms disseminate information about their

application of the Audit Firm Governance Code so as to enhance its usefulness?

16. Should the Audit Firm Governance Code call for disclosure of specific matters, such as major changes in

governance practices, responses to specific concerns raised by the AIU, and any other matters?

It is easily recognisable that the Audit Firm Governance Code will “enter a crowded reporting

landscape” given existing requirements.

There is a need to reduce the risks associated with

codes, and careful drafting could achieve this.

It is important that disclosure is relevant and

proportionate.

Accessibility of disclosures could be enhanced by requiring ongoing updates on

firms‟ websites, making reports available to readers of audit reports and providing links to code

disclosures from other statements and reports. Proactive communication of the application of

the code could also be made through audit committees, stakeholder meetings and open public

meetings.

Areas to be covered by the Code

17. Are there principles and provisions in the Combined Code which you think are particularly relevant or

inappropriate for application to the firms and are there major issues of relevance to the firms that are not

included in the Combined Code?

18. Are there any compelling reasons for departing the Combined Code structure of preamble, principles and

provisions?

19. Can you provide examples, whether or not derived from the Combined Code, from other non-listed company

sectors where you think that appropriate governance codes have been developed, giving information on

their potential relevance to the firms?

20. Do you have any other observations about matters not covered by earlier questions that you think would be

useful to the Working Group in drafting the Audit Firm Governance Code?

As previously mentioned the Combined Code has been developed to meet the needs of

companies where there is a separation of ownership from control and a unitary board.

Such

factors are generally not replicated in audit firms. This combined with some firms‟ international

relationships mean that it is inappropriate to impose a UK governance model upon them and

that some of the Combined Code principles will be inappropriate.

However, the Combined

Code is well recognised by market participants and used as a benchmark and adapted by

companies not obliged to follow.

Thus rather than re-invent the wheel, it would seem

appropriate to use the Combined Code template and adapt as necessary.

Conclusion:

There is general support for the proposal to develop an Audit Firm Governance Code for audit

firms which audit public interest entities.

Using the Combined Code is a suitable starting point

as it is already understood by market participants and has key elements which are easily

transferrable, such as the main and supporting principles and the comply or explain approach.

The aims of the Audit Governance Code are to reduce the risks of a major audit firm leaving the

market, promote audit quality, independence, avoid reputational damage, enhance ethical

standards and ensure an effective corporate governance framework across the whole business

of an audit firm. However, any code needs to have clear objectives, add value, be compatible

with and not duplicate existing regulations, reports and requirements and reflect the structure of

audit firms.

Please contact us if you would like to discuss any of the points made in more detail.

Yours sincerely

Catherine Wright

Joint Head of Policy, Corporate