ICAEW’s Audit Registration Committee (ARC) undertakes ICAEW’s responsibilities as a recognised supervisory body for audit under the Companies Act 2006. Rama Krishnan, Chair of the ARC reviews the issues that are coming before the committee, largely as a consequence of Quality Assurance monitoring visits.
The ARC is responsible for undertaking ICAEW’s responsibilities as a recognised supervisory body under the Companies Act 2006. The committee consists of at least eight members, half of who must be lay members (non-accountants). At present there are six lay members and five chartered accountants. This structure is key to ensuring a balance between technical knowledge and protecting the interests of the public. The ARC’s main work involves reviewing Quality Assurance reports from monitoring reviews to firms, the firms’ responses to the reports and deciding if any regulatory action is needed. The committee also deals with new registered auditor applications and considers complaints against firms in the regulated area of audit. In 2019, less than 10% of firms that received an ICAEW quality assurance visit, were referred to the ARC for concerns over audit quality.
“Some audit firms need to be much better at explaining the rationale for their thinking,” says Krishnan.
“One thing that frequently comes up before the committee is where audit files lack the evidence to support judgements. Why did auditors come to that conclusion? What's the evidence behind it? Auditors need to show their decision-making process and be clearer about what they're doing.”
Linked to that issue is the application by auditors of professional scepticism. “They need to challenge themselves about how they've reached judgements. Sometimes firms come before us because that hasn't happened, and they have relied on the information they have been given without applying sufficient scepticism,” she says. “There’s also the question of whether firms have been thorough enough. Have they spent enough time challenging the information they receive?”
A further issue the ARC often sees is where a firm does not appear to have read or understood ethical standards, and therefore have not followed what they are required to do.
Krishnan points out that the Quality Assurance team inform the committee through their reports, that feedback is given to firms, following a monitoring visit about areas where they need to improve. It is worthwhile taking account of that advice.
It is really important for firms to keep their training up to date. Firms and their staff must familiarise themselves with the standards and keep an eye out for changes.
“What the ARC is seeing much more frequently at present are technical breaches of the Audit Regulations.They may seem like small things, but these can result in regulatory penalties or restrictions on the work that firms can undertake. This could for example, be a failure to notify ICAEW of a structural change or voting rights changes. Such changes can result in a firm no longer being eligible for audit registration. By continuing to conduct audits while no longer being registered, due to structural or voting rights changes, a firm could incur a large fine. It's about having awareness. If a firm’s structure has changed, they must check they are still within the rules. It is a good idea to contact the ICAEW regulatory support team or use the available guide so firms are clear about operating within Audit Regulations.”
Inaccurate completion of the annual return is also commonplace. “It might seem like a small error, but it could come before the committee, and we may well take action. An example of this is if a firm states it has carried out cold file reviews when they hadn’t. Firms must be mindful when completing the annual return. We recommend that when firms fill in the annual return, this is a good opportunity to stop and think about regulation. Don’t think of the annual return as an administrative exercise – it is much important than that. Use it as an annual review and to ask questions. Is there anything that you need to do or to tell ICAEW about?”
It is advisable if you have problems or are unsure, to talk to ICAEW. Try to stick to the commitments you have made when you had a monitoring visit. If you have agreed certain actions but are having difficulties meeting the timescales and requirement then do contact ICAEW at the earliest opportunity and tell us about your circumstances. At the time of writing, this might include changes in circumstances due to COVID-19. “The ARC is likely to give credit for this kind of diligence or show concern where there is evidence of being proactive rather than turning a blind eye”, Krishnan adds.
Perhaps one of the most troubling issues before the ARC is where firms cannot show independence. “One of the most common examples for the committee is fee independence. In smaller firms, that can be a big issue. Independence might be an issue where there are personal relationships which should be at arm’s length, and, of course, lack of responsible individual rotation can give rise to concerns about independence.”
Krishnan adds, “ultimately, the ARC’s role is to protect the public and users of audit services from poor quality work. The ARC will take action as and when it is needed to safeguard the public but ideally it wants to see firms improve and deliver high quality audit services.”
Advice and guidance for firms to remain compliant with the Audit Regulations is available at icaew.com/auditguidance.