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Less complex entities: ICAEW salutes IAASB’s initiative

Author: ICAEW Insights

Published: 29 Jul 2021

ICAEW welcomes the issue of a draft standard for the audit of less complex entities by the International Auditing and Assurance Standards Board as a move in the right direction.

The draft standard is, says the IAASB, “proportionate to the typical nature and circumstance of an audit of a less complex entity (LCE) and is responsive to those stakeholder challenges and is a global solution”. This is the initiative ICAEW – and many other stakeholders – have supported since the inception of the project around five years ago. The draft standard is based on feedback following a discussion paper and will prompt further feedback until the deadline for comment of 31 January 2022.

So why – given the raft of International Standards on Auditing (ISAs) that have been issued – has IAASB felt it necessary to adopt this initiative?

Partly it is in recognition of the role of LCEs in the global ecosystem. It is also an acknowledgement of increasing complexity in the activities of larger companies and global groups, requiring correspondingly complex ISAs. ISAs –particularly some recent revisions – have simply become disproportionately complex and lengthy in relation to the relatively simple activities and structure of LCEs.

The upshot is that various European countries – and countries further afield such as Sri Lanka and India – have developed their own auditing standards for LCEs. Should this trend continue, the result would be the fragmentation of audit around the world.

That would turn back the clock, points out Katharine Bagshaw, ICAEW Technical Manager, Auditing Standards. She says it is worth casting our minds back and remembering that global auditing and accounting standards were developed to accommodate not just the globalisation of business but to help jurisdictions that did not have the resources to develop their own standards. 

The portfolio of world-leading auditing and accounting standards has grown from these modest beginnings more than 50 years ago. “This is a remarkable achievement that came about in a relatively short space of time,” says Bagshaw. “But over time, the length and complexity of international standards have grown too.”

Trying to rewrite the ISAs to address the needs of LCEs as well as the largest of listed entities within the prevailing regime could take a long time, she suggests, increasing the risk of further fragmentation. That is one reason why ICAEW has been so supportive of the IAASB’s initiative Bagshaw notes that there are concerns, such as the omission of group audits from the draft LCE standard.

“Many LCEs are a part of a group and require a group audit. IAASB is saying that all group audits are inherently complex. Is that true? It’s an issue that needs to be resolved,” she says. Further questions relate to adoption of the standard in the UK, and which companies it would apply to. 

Whatever the wrinkles – and there are bound to be many – the IAASB is to be congratulated on reaching the exposure draft stage. “That’s a big deal in its own right,” concludes Bagshaw.

Consultation with as wide a range of stakeholders as possible is a priority. From ICAEW’s point of view, that consultation will probably be the widest it has been short of the recent BEIS white paper on Restoring Trust in Audit and Corporate Governance

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