Accounting career trends in relevant countries and regions
The Financial Reporting Council of the United Kingdom publishes a report on audit supervision methods
Recently, the Financial Reporting Council (FRC) of the United Kingdom released a report entitled "Our Audit Supervision Approach", focusing on the supervision work related to audit quality and strengthening the resilience of the UK audit market.
The report pointed out that the audit supervision work carried out by FRC is supervised by the FRC Supervisory Committee. To this end, FRC has established three working groups for accounting firm supervision, audit market supervision, and audit quality verification to work closely together to carry out supervision activities.
Among them, the accounting firm supervision working group is responsible for comprehensively supervising accounting firms and integrating the supervision information of the other two working groups and FRC related departments.
The Audit Market Supervision Working Group is responsible for supervising the important areas that affect the audit quality and adaptability of accounting firms. Its members come from experts in the fields of corporate governance, risk management, internal audit, culture, supervision, and auditing.
The Audit Quality Checking Working Group is not only responsible for inspecting the auditing business carried out by public interest entities, but also for inspecting the major auditing business carried out by the accounting firm that conducts public interest entity auditing in the British Crown territories and places, and the audit activities carried out by the National Audit Office of the United Kingdom , The audit activities carried out by the Royal Territory Accounting Firm, etc.
The above three working groups closely cooperate with other departments of FRC (such as the audit and assurance working group responsible for formulating audit and professional ethics standards, the economic, strategy and analysis working group responsible for auditing market information, etc.) in supervisory work to communicate with each other. Perform accounting industry supervision duties as a whole, including selecting audit inspection items, confirming key supervision areas, and confirming audit review topics.
The FRC is also working with other British or international regulatory agencies in its regulatory work, including various British accounting professional organizations, the British Prudential Regulation Authority (PRA), the British Financial Market Conduct Authority (FCA), the International Forum of Independent Auditing Regulators (IFIAR), etc. Communicate in order to better perform supervisory duties.
According to the number of public interest entities audited, FRC divides accounting firms into three levels and formulates different regulatory plans for each level.
(Original link: https://www.frc.org.uk/news/march-2021/frc-approach-to-audit-supervision; https://www.frc.org.uk/getattachment/db4ef2e0-72f6- 4449-bda0-c8679137d1b1/FRC-Approach-to-Audit-Supervision-FINAL.pdf)
The Institute of Chartered Accountants in England and Wales pays attention to improving audit quality
Recently, the Institute of Chartered Accountants in England and Wales (ICAEW) published a report entitled "How to Improve Audit Quality", which mainly focuses on the responsibility of various stakeholders in the audit quality supply chain regarding audit quality, important behavioral factors and structure of audit quality The driving factors of globalization and the recommended measures are discussed.
The report pointed out that the public has high expectations for audit quality. They believe that audit quality is a panacea for solving all problems in the financial reporting supply chain. The only way to prevent financial fraud or corporate failure is to improve audit quality. There is no doubt that higher audit quality can help prevent and detect incorrect behaviors of companies, and prevent financial fraud or corporate failures. However, audit quality issues not only involve auditors, but other stakeholders in the audit quality supply chain, including corporate boards of directors, audit committees, audit regulatory agencies, and audit standard setting agencies, should all play their roles to jointly improve audit quality.
The report believes that in order to perform high-quality auditing services, auditors refuse to accept financial reports with insufficient financial information or even suspected information manipulation and deception. Some accounting firms have formulated relevant measures and developed relevant technologies in this regard, but it is actually difficult to conduct audits. The process was successfully implemented.
Nevertheless, auditors should also use the external information of the audited entity in the early stage of the audit project, and even collect information through automated tools and technologies, to discover and emphasize risk issues in a broader scope. Auditors should show their professional skepticism, improve professional skills, and even make more use of expert work and conduct root cause analysis to improve audit quality.
Finally, the report points out the countermeasures to improve audit quality from 7 aspects.
One is that corporate boards should take more measures to ensure that audit committees have appropriate professional knowledge and skills to question the work of management and auditors. The audit supervisory agency should urge the conduct of audit inspectors to align with their goals.
Second, audit regulatory agencies, audit committees, investors, and auditors need to work together to formulate relevant frameworks and methods to measure and report audit quality indicators.
The third is that standard-setting agencies and accounting firms should develop relevant tools and technologies so that auditors can flag and manage information manipulation and fraud.
Fourth, the audited entities and accounting firms should evaluate the costs and benefits of using experts to work.
Fifth, accounting firms, regardless of their size, should carry out root cause analysis, at least a simple root cause analysis.
Sixth, auditors and audit committees need to work together to improve the transparency of reports, and audit regulators and investors need to further discuss their role in improving audit quality.
Seventh, standard setting agencies should consider alternatives to accounting assumptions and models that the current audit standards rely on to ensure that high-quality auditing is still a valuable service.
(Original link: https://www.icaew.com/technical/thought-leadership/audit-and-assurance-thought-leadership/audit-quality-how-to-raise-the-bar; https://www. icaew.com/-/media/corporate/files/technical/audit-and-assurance/the-future-of-audit/audit_howtoraisethebar.ashx)
German regulators strengthen audit supervision after Wirecard scandal
In June 2020, the bankruptcy of German financial service provider Wirecard, aroused the attention of the global payment industry. In order to prevent similar incidents from happening again, the German supervisory authority formulated the "Enhancement of Financial Market Integrity Act", which puts forward new requirements for the governance and audit of public interest companies:
One is that listed companies and other public interest entities must establish a statutory audit committee composed of at least two financial experts before January 1, 2022. One expert must have professional knowledge in the accounting field, and the other expert must have expertise in the audit field. Professional knowledge.
The second is that the board of directors of listed companies must establish effective internal control and risk management systems that are compatible with the scale of business and risks. The accounting firm must be rotated every 10 years at the longest, and the key audit partner must be rotated at the longest every 5 years.
The third is to increase the upper limit of auditors' civil liability and strengthen criminal liability for accounting and audit crimes. The upper limit of civil liability for negligence assumed by auditors for audits of listed companies and other companies on the capital market is increased to 16 million euros; the upper limit for civil liability for negligence undertaken by audits of other public interest entities is increased to 4 million euros; The civil liability for negligence is capped at 1.5 million euros. In the case of deliberate or gross negligence, the civil liability of listed companies and other companies on the capital market is not subject to a ceiling; the maximum civil liability of other public interest entities is 32 million euros.
In addition, according to the revised Securities Exchange Law, from January 1, 2022, the Financial Report Enforcement Working Group (FREP) will be revoked, and the German Federal Financial Supervisory Authority will be responsible for the enforcement of financial reports and expand its powers, including searches for companies and Residential premises, confiscated documents and other evidence, etc. The auditors of insurance companies will no longer be appointed by the board of supervisors, and shareholders will decide whether to hire them.
Many German auditors and corporate finance directors worry that the new bill will increase audit fees and weaken market competition. Deloitte Germany CEO Volker Krug said that these changes may lead to increased market concentration and a decrease in the number of small and medium-sized accounting firms; Karl Heinz, head of the German accounting firm Greis & Brosent GmbH · Karl-Heinz Brosent worries that the new bill’s increase in the civil liability ceiling will cause people to abandon or no longer engage in the audit industry; Siemens’ chief financial officer Ralf Thomas (Ralf Thomas) said that this may jeopardize corporate submissions Audited financial statements and ability to pay dividends. However, German Congressman Florian Toncar pointed out that the lack of effective communication within the regulators led to the Wirecard scandal.
In a speech at the European Policy Center, EU Commissioner for Financial Services, Financial Stability and Unified Capital Market Mairead McGuinness pointed out that high-quality corporate reporting comes from three pillars: corporate governance, auditing and supervision. For this,
First, the EU will issue a whistleblower law to promote the whistleblower system to play a more important role in the corporate governance system;
Secondly, the European Union is studying audit-related laws and regulations and planning to legislate, and some EU member states are improving audit quality by shortening the auditor's rotation period, splitting audit and non-auditing services, and implementing joint audits;
Furthermore, EU member states' regulatory agencies and EU regulatory agencies will strengthen cooperation, strengthen the governance and independence of regulatory agencies at the national level, and promote the EU to strengthen corporate information supervision as a whole.
(Original link: https://ec.europa.eu/commission/commissioners/2019-2024/mcguinness/announcements/speech-european-policy-centre-corporate-reporting-capital-markets-union-after-wirecard_en; https: //www.wsj.com/articles/after-wirecard-germanys-proposed-audit-overhaul-worries-finance-executives-11617868813; https://www.gibsondunn.com/consequences-of-wirecard-scandal-new- requirements-for-corporate-governance-and-audit-of-german-listed-companies/)
The annual inspection report issued by the Hong Kong Financial Reporting Council shows that the audit work of listed companies needs to be improved
On June 3, the Hong Kong Financial Reporting Council (FRC) issued its first annual inspection report. In this inspection, the Hong Kong FRC inspected the audit quality of 37 listed companies’ audit projects and 18 accounting firms that conduct audits of listed companies’ financial reports.
The inspection results show that as many as 73% of audit projects require improvement or major improvements.
Among them, among the audits carried out by Type A accounting firms (including the Big Four, BDO, HLB, etc., which carry out more than 100 financial report audit projects for listed companies each year), nearly 20% of the audit projects need to be improved. Among the audits conducted by BDO, HLB, Deloitte, and Ernst & Young, nearly 10% of audit projects each require major improvements. KPMG performed the best in this spot check, with only 3 audit items requiring limited improvement. However, the Hong Kong FRC emphasized that the above inspection results should not be regarded as a gap in the audit quality of various accounting firms.
Type B (the number of audit projects for listed companies’ financial reports performed annually is more than 10, but less than 100), accounting firms have the worst inspection results, and audit projects that require major improvement account for about 70%.
Among the C-type accounting firms (the number of audit projects that perform listed company financial report audits every year is less than 10), the audit projects that require improvement and major improvements account for about 40%. The audit projects carried out by accounting firms in all groups have not received good ratings. However, the Hong Kong FRC stated that the inspection mainly focused on the audit quality of accounting firms and should not be regarded as the quality of the financial reports of related listed companies.
Mr. Marek Grabowski, Chief Executive Officer of Hong Kong FRC, pointed out that the above inspection results reflect a major problem, that is, accounting firms generally lack professional skepticism, including excessive reliance on management statements, and the key to management’s use Insufficient inquiries on assumptions; failure to raise sufficient inquiries on the basis of complex and abnormal business activities and fraud risks; failure to consider factual evidence, etc. 81% of audit projects show lack of professional suspicion. In the audit projects of type B accounting firms, this proportion even reaches 100%.
Hong Kong FRC stated that it hopes that all audit projects will reach a level that is good or requires limited improvement. In addition, FRC will gradually expand the scope of spot checks. The report has been submitted to the Hong Kong Special Administrative Region Government.
(Original link: https://www.frc.org.hk/zh-cn/news-events/news/news-article?folder=FRC%20issues%20its%20Annual%20Inspection%20Report; https://www. frc.org.hk/en-us/FRC_PressRelease/Press%20release_SC_Final.pdf; https://www.frc.org.hk/en-us/Documents/Publications/periodic-reports/2020_Annual_Inspection_Report_Traditional%20Chinese.pdf)
International Accounting Company News
Ernst & Young calls for a firm defense against financial fraud
The Ernst & Young website published an article entitled "Strengthen the Line of Defense against Financial Fraud in Europe", discussing the use of three lines of defense, namely, strong corporate governance and supervision, statutory auditing, and supervision and law enforcement activities of regulatory agencies to combat finance Fraudulent activities.
The article believes that auditing plays a key role in the financial reporting ecosystem, and effective auditing will enhance the integrity of the capital market. In the event of a serious case of corporate financial fraud, the auditor's practice activities should be strictly reviewed, but it is impossible for the auditor to crack down on financial fraud alone.
The article quoted the latest speech of the European Commission Vice President Valdis Dombrovskis (Valdis Dombrovskis), pointing out that the above three lines of defense create a complete ecosystem to detect and combat collusive financial fraud activities.
Based on the above three lines of defense, the article calls for specific measures to improve the financial reporting ecosystem, including:
With reference to the practices of other countries and regions, when their stocks are included in major stock market indexes, relevant companies must implement strong corporate governance and effective internal control of financial reporting, so as to quickly reduce the risks borne by investors. At the same time, the company must address fraud risks and set clear and specific responsibilities for stakeholders (including management, board of directors, audit committee, and internal audit) in order to strengthen the internal control system for financial reporting.
Regulatory agencies responsible for supervising law enforcement should also have relevant powers and master relevant technologies. Clear evidence shows that in other countries and regions, strong regulatory agencies can effectively combat corporate fraud. Whether it is fighting fraud or fighting financial crimes, European regulatory agencies can consider concentrating resources to hunt down international fraud personnel and carry out cross-border coordinated supervision.
When discovering increasingly complex corporate frauds, auditing standards must be applicable. Europe should ensure that its rules are consistent with the strictest anti-fraud guidelines. Welcome to the advisory activities recently initiated by the International Auditing and Assurance Standards Board (IAASB) and the UK Financial Reporting Council (FRC).
The article pointed out that all relevant parties, including company management and board of directors, auditors and regulatory agencies, can pay more attention to corporate culture and behaviors to detect fraud. Fraud is usually applied to the fraud triangle model (a model that considers the risk of fraud through the three elements of opportunity, pressure, and behavioral rationalization). Technological progress can better assess stress and rationalization of behavior, and incorporate the results into the fraud risk assessment process. For example, the internal control system of the company's financial reporting should be incorporated into the fraud triangle model, and the accounting industry can also review the above three elements through professionals with different skills to improve the ability to detect fraud.
The article stated that auditing needs reform, but unless the other two lines of defense against corporate fraud are strengthened, the accounting industry’s efforts will be futile. In short, in order to combat fraud, all stakeholders must work together to improve the entire financial reporting ecosystem.
(Original link: https://www.ey.com/en_gl/assurance/to-combat-financial-fraud-in-europe-strengthen-every-line-of-defense)