John Selwoods audit clinic
This time John looks at Brexit-related issues and discovers that it can be a dangerous territory.
There is a lot of talk about auditors considering the impact of Brexit. What exactly should they be doing?
There are so many ways in which individual auditors, firms and networks may need to consider the potential practical, technical and professional impacts of Brexit that it is impossible to answer your question thoroughly here.
Some auditors will need to consider matters such as how Brexit may impact the recognition of their professional qualifications and the situation related to automatic audit rights in Ireland; some may not.
Brexit will add an additional aspect to many audits, but will not impact businesses in a uniform manner. It is necessary for auditors to understand how the entity might be affected by Brexit, and identify and assess any resulting risks – and my fairly basic answer focuses on this.
The following is intended to give an indication of the sort of issues that auditors will need to understand. It is not intended to be exhaustive. More can be found on the ICAEW Brexit hub (and you can find information on this below and on the right).
Understanding the entity
Auditors will need to understand how the business might be affected by Brexit, in terms of changes to the way the business operates, which might be particularly significant if the company has cross-border trading. The auditor may also need to understand whether Brexit might affect the business itself, in terms of revenues, costs and cash flows. The responsibility for Brexit-related analysis and disclosures rests with the audited entity, but auditors will need to address situations in which the analysis is inadequate or non-existent.
It is vital that the auditor considers how all of this might impact on the risk of fraud or error in the financial statements. Business risks in general are of interest to the auditor but only insofar as they affect the financial statements and relevant narrative reporting, such as strategic reports. Certain areas in the financial statements could be particularly affected where there is uncertainty about the future. For example, these could include:
For more information on the audit and financial reporting implications visit the ICAEW Brexit hub and the section dedicated to audit-related Brexit matters.
On a recent audit, I challenged management about the adequacy of disclosures relating to uncertainties driven by Brexit. This angered my client and he said that the only uncertainty was whether he had big enough bags to carry home all the money that he was going to make from new, post-Brexit trade deals outside the EU. He then accused me of being part of ‘project fear’. I don’t know how to react to this and am concerned about being similarly challenging in future. Are other auditors experiencing similar issues?
Yes. This is a sensitive area and sometimes you have to be very careful to avoid the politics. I have heard of other auditors who have been accused of being a mouthpiece of ‘project fear’.
The saying goes, never discuss religion and politics at the dinner table. Equally, politics has no place in discussing auditing and financial reporting. Leaving the EU has split the country and it is naive to suggest that political issues do not hang heavy in any Brexit-related discussions, but auditors need to develop tactics to retain their independence and be able to do their jobs properly.
I am confident that auditors should be able to set aside their personal views on Brexit and act with independence. After all, maintaining independence is one of our specialist subjects. The key is to identify this threat to independence and address it.
I do worry that management might not be able to do this so easily. Business people, particularly those with a powerful entrepreneurial spirit, might take the opportunity to make points or give vent to their frustrations when reporting on the topic. When there are strongly held views, auditors need to be alert to this and factor it into their risk assessment accordingly.
Auditors may find they have to challenge the accuracy or adequacy of disclosures or narrative reporting. They may also need to push for sufficient evidence to support the basis of assumptions used for accounting estimates. Management or those charged with governance might push back hard against this and it could give rise to intimidation threats, which the auditors might need to address with safeguards, such as second partner review.
This year is set to be an interesting one for auditors.
ICAEW Brexit Resources
All of ICAEW’s Brexit resources can be accessed from its dedicated hub.
It contains a mixture of analysis, articles, helpsheets and other kinds of support. Some of this information has been developed specifically for members in business, practice or particular specialist areas; some of it has broader relevance.
There are sections offering technical guidance covering:
- financial reporting
- tax and duties
- financial services
- corporate finance
- data issues
- business and management
- the accountancy profession
- analysis of how EU law affects business and
- ICAEW Brexit analysis
ICAEW’s Library and Information Service has collated resources of external webpages and hubs on Brexit-related issues focusing on, for example:
- financial reporting
- supply chains
- the workforce
- a no-deal scenario
- treasury and cash management
- an A-Z of industry specific guidance (from aviation to video games)
Email us your Brexit questions
Accountants can email their Brexit questions to ICAEW by visiting the Brexit hub.
ABOUT THE AUTHOR
John Selwood is a member of the faculty’s Practitioner Services Panel and a freelance lecturer and writer