Better and more meaningful information about why an auditor has resigned, been dismissed or decided not to participate in a retender could ultimately help to improve the quality of audits, ICAEW believes.
In his 2019 Review, Sir Donald Brydon suggested that the vast majority of auditor resignation statements say little of substance and they are not being shared in a timely manner. Although the requirements for auditor resignation are set out in the Companies Act 2006, they are complex and, according to Brydon, not well understood or consistently followed.
In its 2021 White Paper on restoring trust in audit and corporate governance, the government agreed that the existing Companies Act provisions in this area are failing to provide enough meaningful information to shareholders and the regulator about the reasons for an auditor’s departure.
In anticipation of the government’s hotly anticipated decision on the BEIS consultation, ICAEW guidance highlights a number of actions that auditors can take now to help drive more informative resignation statements.
Already ICAEW’s response to the BEIS consultation recommended that there should be a requirement for auditors to always provide a reason for resignation as a more effective solution to ensuring transparency, adding that there should also be greater opportunity for shareholders to question the directors about the reasons why an auditor has ceased to hold office.
“Part of the problem is the complexity of the rules, which vary depending on whether the company is a public interest company (PIC) or non-PIC, whether a non-PIC is a public or private company and when the auditor ceased to hold office,” says Louise Sharp, Technical Manager in ICAEW’s Audit and Assurance Faculty.
“It is therefore important for auditors to be clear on how the rules affect them, including whether and by when they need to make a section 519 statement of reasons for ceasing to hold office and who it needs to go to. Both ICAEW and the FRC have published guidance to help with this,” Sharp adds.
The Companies Act does not provide guidance on the kinds of matters that should be brought to the attention of members and creditors, instead leaving it to the auditor’s judgement. ICAEW says the current requirements on auditor rotation may result in more resignation statements where auditors have simply chosen not to retender, but such information alone is not helpful for stakeholders as it provides no clarity on why they have made that decision.
Communication and documentation are key, ICAEW warns. “Auditors may be in for some difficult conversations with those charged with the governance of a company about resignation statements, if their decision to resign comes out of the blue, without concerns or issues having previously been raised with them.”
Ongoing dialogue relating to concerns should be brought to the attention of those charged with governance as the audit progresses, and clearly documented in audit files. “This will help to support auditors’ judgements as to what matters to bring to the attention of members and creditors,” ICAEW says.
The guidance also highlights requirements relating to the way that resignation statements should be presented and raises awareness of the need for audit firms to address auditor resignation and client acceptance considerations as part of their quality management systems, all the more important with implementation of the new standard on quality management, ISQM 1, on the horizon.
Nigel Sleigh-Johnson, Director of Audit and Corporate Reporting at ICAEW added: “This is an important area of concern that the wider audit reform agenda has drawn attention to. It is vital that the profession is seen to be proactive in responding to such concerns. Our guidance should help but we are keen to hear from ICAEW members and other stakeholders on other actions that could be taken to help drive more informative resignation statements.”
- Read the guidance paper in full.
- Both ICAEW and the FRC have produced guidance notes on the requirements, including flowcharts to help auditors understand what they need to do and by when.
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