Host
Philippa Lamb
Guests
- Alex Russell, Head of Audit and Assurance Strategy, ICAEW
- Sally Baker, Head of Corporate Reporting Strategy, ICAEW
- Lindsey Wicks, Senior Technical Manager, Tax Policy, ICAEW
- Christopher Greenhalgh, Manager, Professional Standards, ICAEW
Transcript
Philippa Lamb: Hello and welcome back to the Insights Podcast. I’m Philippa Lamb with this month’s accountancy news. And we’ve got something of a bumper episode this time. We’ll be discussing how firms can maintain momentum on the International Standard on Quality Management, ISQM for short, as well as changes in preparation and filing following the Economic Crime and Corporate Transparency Act. We’ll also hear about ICAEW’s new podcasts for tax aficionados, The Tax Track, and we’re going to brush up on recent changes to the Engaging in Public Practice Certificate. So with us remotely today, Alex Russell, Head of Audit and Assurance Strategy; Sally Baker, Head of Corporate Reporting Strategy; Lindsey Wicks, Senior Technical Manager, Tax Policy; and Chris Greenhalgh, Manager, Professional Standards. Hello, everyone. Thanks for being with us.
All: Good morning. Hello. Thank you. Good morning.
PL: So, lots to get through this time. Should we kick off with ISQM? Alex, can you just remind us what it is and when did it come into force?
Alex Russell: ISQM is the International Standard on Quality Management, the major standard being ISQM 1, which required firms within scope to design and implement a system of quality management by 15 December 2022. And actually the firms in scope were those that carry out audits or reviews of financial statements or other assurance or related service engagements, ISQM 2 governs the applicability and requirements around engagement quality reviews, and ISA 220 Revised looked at the quality management at engagement level. And one of the fundamental principles around ISQM 1 was eight different elements and a handful of the most important ones being the firm’s risk assessment process, its governance and leadership, its engagement performance, of course, resources, including how you interact with service providers, and monitoring and remediation, which I’ll probably come on to a bit later.
PL: What was the essential plan here? How was it intended to raise audit quality?
AR: Well, the first clue is really in the name – quality management replacing quality control. And that itself, putting emphasis on a proactive, continuous process rather than just a consideration at a point in time. And together with that, putting more emphasis on a firm’s leadership for continuous improvement in audit quality, and really trying to embed a culture that supports that commitment to quality.
PL: So very central to this is the idea that this is not a one-and-done piece of regulation. This is not a box-ticking exercise. It’s a continuum.
AR: No, absolutely. So the central tenet is that you design a system of quality management and that one of the fundamental principles is that it is tailored to the nature of your firm. And it’s very unlikely that two firms are alike, you have different people with different skills, you might have different specialists, you might be at a different stage of technology application. And usually your client base of audited entities will look very different. You might have different specialisms in different sectors in different industries. So all together the ISQM should be tailored to the nature and circumstances of your firm. And the thought process also isn’t dramatically different to those approaching an audit. You risk assess it and then you design procedures to address that risk and ISQM 1 is really no different. You’re trying to establish what’s known as quality objectives, and then identify risks to that, and then design and implement responses. So it is an iterative and continuous process.
PL: So Alex, what was the thinking there, then?
AR: Well, it’s taken firms some time and resource to get their systems of quality management up and running. But another reason you wouldn’t want to stop and stand still now is that in the future you could well expect to get some benefits from root cause analysis. So do you have learnings from your audit functions that you can apply outside, to other functions, such as tax? But, also, some firms I’ve spoken to have started positive root cause analysis as well, so finding out what went right, not just what went wrong on their files, finding out which teams work together and what examples of good documentation look like.
PL: So that’s encouraging.
AR: It’s encouraging to hear those conversations are already happening.
PL: So tell us where do you think firms might struggle with this?
AR: I think, from conversations I’ve been having with our committee members and working groups, it’s probably in around two areas. Firstly, this standard was quite different in terms of needing buy-in from the leadership at the firm and the tone from the top. And one of the major challenges has been keeping that going. So there might have been a lot of focus when the headline deadline of 15 December 2022 was in the front view, but leadership should continue to be highly involved in the process and continue to take the lead. Secondly, culture doesn’t change overnight. And one of the new requirements in ISQM 1, around root cause analysis especially, requires very open, very blame-free conversations. And that doesn’t come naturally to most, especially if root cause analysis is being done internally by peers, rather than someone else coming into to help you out. And, I think culturally in firms in the past, there’s a real fear of admitting to mistakes and thinking that might affect progression, a fear of asking for help. And, also, key to root cause analysis is interviewing people throughout the audit team, so juniors, perhaps unprepared to speak up or feedback on their seniors. And a very good point was made to me by the chair of our working group last week, actually, that perhaps we’re living in a culture of “bring me solutions, not problems” and actually ISQM 1 and root cause analysis requires you to bring the problems, analyse them, look at the causes, and try and remediate them. And I’ll just add one thing, it might not be that firms are struggling so much, it might be that when firms were looking about two years ago at getting this in place, they might have thought, as you just mentioned, it’s sort of one-and-done, but they stood still in the intervening period. But actually a lot has happened in a year or two. You might have had changes in staff – hired people, lost staff – your client base might have changed, and the economic environment is very different. You might have entities with a greater going-concern risk or elevated fraud risk. And so you really need to consider if these have actually changed your quality objectives and your risks.
PL: Yeah, there’s a lot to think about here, isn’t there? I know ICAEW’s quality assurance department has been monitoring how it’s all been going. What’s their take on this so far?
AR: They carried out a survey in the first half of last year and the start for most firms was positive. In the medium-sized and large firms they saw better whole-firm procedures and a lot more procedures formally documented around CPD requirements and independence, which are very important. At this moment in time, that’s 15 December 2023, firms are required to do a first annual evaluation and reflection of where you are in your ISQM. So that’s pretty critical at the moment, and we’ll be doing more to support that. And in fact, it’s okay, you know, if you find yourself in a lower category, in a QAD review, I think firms need to reflect on that and learn from it really, and focus on how to carry on with that continuous improvement. QAD will also be doing ISQM 1 focus visits to certain firms during the year. And I know they’ll be putting on a webinar, helping firms prepare for a QAD visit. But really, now that firms have got this ISQM up and running, it’s really that monitoring and remediation cycle that’s going to be really the driving force of the high-quality system.
PL: Yeah, that’s really helpful, Alex. You say there’s going to be assistance. Where can members go if they would like to find out more about this – more information, more resources to help them get through it.
AR: ICAEW has a quality management hub that has a collection of articles and webinars and podcasts that we built up over the last couple of years. And then in the pipeline, you mentioned maintaining momentum, which is really important for us, on the back of an event in November, we’ll be following up with particles interviewing some of the panelists, we’ve got further articles coming on the annual evaluations I just mentioned, and engagement quality review for sole practitioners and smaller firms as well. And actually, ICAEW has got a new CPD course up and running on root cause analysis as well. Those are just some of the things we have already or are in the pipeline.
PL: So a whole array of resources and help outside by the sound of it.
AR: Absolutely.
PL: Thanks very much, Alex.
AR: Thank you.
PL: Next up, those changes in preparation filing following the Economic Crime and Corporate Transparency Act. The Act received Royal Assent on 26 October last year. You may remember, we covered the content in Episode 63 of the podcast, that was December. Today, we’re going to look in particular at preparation and filing requirements. Now Sally, this is your area. The Act has made a few changes to the preparation and filing of accounts. Before we get into them, what was the overall goal there?
Sally Baker: The overall goal of the Act clearly is to try and prevent abuse of the corporate framework and tackle economic crime. But alongside that, the Act is trying to improve the quality and value of financial information that is held on the UK Companies Register. Also to just better serve the needs of the 21st-century economy and move it forward.
PL: Companies House is at the centre here, as well, isn’t it?
SB: Yes, it’s about making Companies House fit for purpose and better able to serve the needs of a 21st-century economy.
PL: So shall we run through the key changes? I think the Act has simplified filing obligations for small companies, hasn’t it?
SB: So small companies will no longer be able to file abridged accounts. They will also be required to file their profit and loss account and their directors’ report and that removes the option of filing so-called ‘filleted’ accounts. And then as well as those changes for small companies, there’s also some changes for micro entities, because they will also be required to file their profit and loss accounts, but they will continue to have the option to not file a directors’ report.
PL: Now, as I understand it, the Act also says, while smaller micro companies have to file this P&L account, they do not need to be made available to the public. And I think that was because concerns were raised, weren’t they, during consultation by ICAEW and by others?
SB: Yes, exactly. This is probably the biggest area of change from what was in the Bill compared to what has come through in the final Act. So in the original Bill, it was just simply that small and micro entities would need to file their profit and loss account. And by filing their profit and loss account that puts it on the public record at Companies House. There were concerns around that during consultation, it’s a very finely balanced argument. There are people that firmly believe that the transparency is the price of having a limited liability, of being a company and having that limited liability. Others, on the other hand, including ICAEW, we are concerned about businesses being able to carry on trade effectively, and that filing certain information in the public domain can be prejudicial to the interests of those small companies and their shareholders. So, during the parliamentary debate, there were various consultations and there were various debates around that point. And where it’s landed is that there is going to be provision for that information to not be made publicly available, or parts of it to not be made publicly available.
PL: We’ll be waiting on regulations for that?
SB: Yes, exactly. The detail behind all of that is unclear at the moment, it’s still being considered in what circumstances that provision might be enacted. Like you said, we’ll need regulations to be passed by parliament before that is used, so definitely something to be watching out for how that develops.
PL: And the audit exemption statement? That’s been expanded upon?
SB: That’s correct, yes. So at the moment, when claiming an exemption from audit, directors currently have to state that they have claimed that exemption on the balance sheet. The Act extends this requirement and it’s going to require directors to include details of the exemption that is being taken, so identify the exemption that’s been taken, and also to confirm that the company is eligible to take that exemption. And that will apply to all companies, including dormant companies.
PL: Looking ahead, we’re expecting a secondary legislation to enforce the electronic delivery of documents. So what’s the thinking there? And when do you think we’re going to see that?
SB: Well, Companies House has a strategic goal of being a fully digital organisation by 2025, so I think that’s something to bear in mind. As we’ve alluded to, all of these changes that are being introduced by the Act do require some secondary legislation and that is going to take some time. It is a big package of measures within this Act, and we’re only just picking up on a small part of it today, so we’re expecting things to be phased in probably over the next two to three years.
PS: Let’s end with my usual question of where should members go if they want to find out more about this and keep up to date?
SB: The Corporate Reporting Faculty, our webpages will signpost members to changes. And by registering to be a member of the Faculty, you’ll receive our monthly bulletin. And we’ll also be using other channels such as our digital magazine, By All Accounts, to keep members informed. And then the government also has a Changes to UK Company Law hub that they have created, keeping people informed of changes that are introduced by the Act.
PL: That’s great. Thanks very much, Sally.
SB: You’re welcome.
PL: We’re going to move on to tax now because ICAEW’s Tax Faculty launched its own podcast last month. Lindsey, you’re hosting it. Tell us all about it.
Lindsey Wicks: The podcast is called The Tax Track and new episodes will be going out monthly. So far we’ve had two episodes. It brings together experts from across the Tax Faculty to discuss the latest developments and help listeners understand the context. We also talk about the possible implications for practitioners and taxpayers.
PL: And you’re going to be covering a range of issues on tax?
LW: We cover the more expected to the more unusual. So, for example, in February we covered changes to the cash basis from 6 April, and what factors might influence the decision for self-employed and partnerships to use a cash basis, but we also looked at an interesting capital allowance case where two types of camping pod that looked identical from the outside were held by the First-tier Tribunal to be different when it came to whether they qualified as plant and machinery. You know the saying it’s what’s on the inside that counts? That was certainly the case here.
PL: Yes, that does sound quite obscure, Lindsey, I’ve got to say. I'm hoping we’ll still be able to tempt you and your colleagues on to this podcast, too?
LW: Yes, absolutely. Tax Track’s a space for specialists and those with a deeper interest in tax but we’ll continue sharing updates from tax in this podcast, too. Tax is relevant to everyone, we all pay it. And everyone working in accountancy in business also needs to keep up to date with developments.
PL: I’ve listened to the first two episodes, it sounded great. Are you enjoying doing it?
LW: It’s great to get the team together to talk about tax – we love talking about tax. So the format of the podcast is that each episode we convene a roundtable of panelists drawn from across the Tax Faculty, depending on the hot topics that listeners need to know about.
PL: It’s a real family affair, isn’t it?
LW: It is, yes. The Tax Faculty team is home to experts in a variety of taxes, so our hope is that members tuning into the podcast will gain an understanding of the different personalities, where our expertise lies, as well as the topics being discussed. It’s important for us to be visible in this way. We want members to know how they’re being represented, particularly as we input into consultations that shape the profession and the way it’s going forward.
PL: Well, just like this podcast, you can listen and subscribe to Lindsey’s series on any podcast app. The Tax Track is the name to look for, or you can listen on the ICAEW website if you prefer: icaew.com/podcast. Obviously, we will link to the series in the show notes for this episode. Thanks so much, Lindsey.
LW: Thanks, Philippa.
PL: And finally, the ICAEW statement on members engaging in public practice came into effect on New Year’s Day. Now we covered the changes and eligibility in Episode 50 back in May. That’s a while back so we thought we’d quickly recap the key points. Chris, what’s changed in this statement?
Chris Greenhalgh: Yeah, so just to recap on the main changes that we’ve had the revisions on. So in the new guidance, the references to the EEA have been removed, following the UK’s exit from Europe, so obviously that’s happened, and we needed to just tidy up the wording around that. But what that enabled us to do is actually tidy up a few other areas, and points which were causing members issues or, indeed, causing ICAEW issues where the guidance wasn’t clear enough. So we’ve defined the definition of the UK, we’ve removed the 10% de minimis limit, which was causing some issues in terms of firms not understanding when they’re required. And more importantly, what that did was align our guidance with the money laundering regulations where there’s no such de minimis limit. We’ve also highlighted other areas where it needed clarity in terms of charities and what people can do in terms of pro bono work and the member’s responsibility when it comes to signing an independent examiner’s report.
PL: So who now needs a practising certificate?
CG: So largely things haven’t changed, this guidance has been around for a long time now. And it was more an opportunity to update it rather than a wholesale change. The previous guidance was largely fit for purpose, so the impact is very minimal in most areas. What I would say is that if you are engaged in public practice and you’re a principal or held out as a principal in a public practice, then you will require a practising certificate and there is more guidance on that, obviously, in the body of the statement. But we have got some more guidance in an annex, too, which covers some common examples.
PL: Do you want to just clarify for us, what makes you a principal, Chris?
CG: What makes you a principal is that if you’re an ICAEW member in a sole practice, a salaried or equity partner of a partnership, an ICAEW member of a limited liability partnership, whether that be designated or non-designated, and then all types of statutory director including de jure or de facto directors, and also if you are held out as a principal in that practice, you will be requiring a practice certificate as well.
PL: And it’s important to mention, you don’t need this certificate for accountancy services if no fee is charged for the work, is that right?
CG: Yes, that’s correct. And that’s clarified in the statement as well. And we talk about no fee or monetary reward or a token, non-monetary reward or benefit is received for the work.
PL: Now there is an amnesty period, isn’t there, because there’s a deadline, but there’s also an amnesty period. Do you want to just run us through how the rules work on this?
CG: Yeah. And that’s the key thing that we wanted to bring to members’ attention with this podcast is that it is effective 1 January 2024. If you read the guidance on our website and our hub, and read the different scenarios that we’ve got there, and you then decide that you require a PC, because you’re now caught by the updated guidance, then there is an amnesty period until 30 April. So you really need to be looking at this guidance and apply for your practice certificate before 30 April. And if you do so, then what we’re saying in this amnesty period is that there’ll be no disciplinary action taken on you for not having a practising certificate, but now realising you needed one.
PL: So that’s important for members to know, isn’t it? If they’ve missed this and they’ve suddenly woken up to the fact that they’re a bit late to it, they’ve got until 13 April, and they won’t face disciplinary action, as long as they apply by that date. That’s right?
CG: That’s right. That’s correct.
PL: Anything else they need to know?
CG: I think the other key thing is that we’ve built a website hub for the practice certificate and there’s some more information on there – there’s articles, there’s obviously the podcast that we did previously, and there are some common scenarios that are worth taking a look at to see if you fit in any of these areas that might have changed. Or typically, in the past, we’ve received questions and queries from members about whether they require a PC into our technical advisory services helpline. So there’s a number of scenarios that are common, that people can go and have a look and see where the grey areas might become more clear. But what I would reiterate is that it is the members’ responsibility to determine themselves whether they require a practising certificate.
PL: Now there’s a hub for members where they can go and check up and all this, but can you just remind us, Chris, how members apply and how long that process is likely to take?
CG: In the hub there is a link to, essentially, the application to apply for a practising certificate, so that information is contained in the hub. And when we say how long will it take, we have seen an uptick in applications for practising certificates, following our communication strategy over the last 12 months, so I would say at the moment we typically give timeframes between eight and 12 weeks for the application process to go through.
PL: Okay, so now is the time then if the amnesty ends on 30 April.
CG: Yep. So it’s important to note on the amnesty that you need to apply by 30 April. It’s not apply and be granted, it’s to apply by 30 April. And that’s the key thing, get the application in now.
PL: That’s great. Thank you very much, Chris.
CG: Thank you.
PL: That’s it for this month. Head to the show notes as usual for more information on everything we’ve covered today. Join us later in the month for February’s In Focus podcast, and this series will be back in early March. In the meantime, why not rate, review and share this episode and subscribe to the whole series on your app. And, as you may know, daily, weekly or monthly newsletters from ICAEW Insights are available with all the latest accountancy news. You can find them on the website, you can sign up for them there at your preferred frequency. Thanks for being with us.
