International Accounting Professional Trends (No. 7 of 2021)


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International Federation of Accountants discusses the digital transformation of member organizations

Recently, the International Federation of Accountants (IFAC) and the World Bank jointly organized a digital transformation exchange event for accounting professional organizations. Representatives of 20 accounting professional organizations from Africa, the Middle East, Latin America and the Caribbean participated. Participants discussed the five key measures implemented by accounting professional organizations to promote digital transformation, including:

First, in terms of institutional governance, management decisions determine the direction of future development. Participants believe that when the management has a clear vision for digital transformation, the digital strategy of the accounting professional organization will often make tangible progress, and vice versa. Therefore, management decision-making plays a leading role in digital transformation.

The second is to formulate and implement a user-centric digital transformation strategy. Digital transformation requires a clear strategy, which clearly stipulates strategic objectives, implementation plans, time planning, etc. First, the management should maintain communication with its members and stakeholders, and comprehensively consider relevant needs and expectations. Second, management should regularly solicit opinions from members and stakeholders on new digital tools to improve user experience and establish a virtuous circle with the outside world. Participants believed that, under ideal circumstances, the digital strategy should be consistent with the overall strategy of the accounting professional organization, because digital is the implementation tool of the overall strategy.

The third is to connect with the national digital economy ecosystem. Accounting professional organizations should maintain close communication with competent government departments and pay close attention to the digital transformation process in the country or region where they are located. Participants believe that government departments will strengthen the construction of digital infrastructure and provide a digital platform for the public and enterprises to accelerate the digital transformation of government management and services and realize digital empowerment. Therefore, accounting professional organizations should take advantage of digital transformation initiatives in their country or region to incorporate digital skills into accounting qualification and continuing education courses to enhance members' digital skills.

The fourth is to have sufficient human and financial resources. Accounting professional organizations not only need to make correct investment decisions to obtain better investment returns, but more importantly, strengthen the budget guarantee for digital transformation that is closely related to members. In terms of personnel protection, accounting professional organizations can consider measures such as appointing a dedicated person in the secretariat, inviting external experts, outsourcing services, or setting up a digital transformation committee.

Fifth, it is necessary to cooperate with other institutions. As a member organization of IFAC, accounting professional organizations can make full use of the IFAC international network to obtain international or regional resources and share information. Various accounting professional organizations should also actively cooperate, especially with accounting professional organizations that are carrying out digital transformation. They can share experiences and lessons about digital transformation, provide digital strategy formulation suggestions, and guide how to purchase related software or obtain related technologies. .

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The Financial Reporting Council of the United Kingdom seeks comments on the "Code of Corporate Governance for Accounting Firms"

In order to promote high-quality audits, the Financial Reporting Council (FRC) revised the "Code of Governance of Accounting Firms" and issued a draft for comments on August 26, 2021. The code was formulated in 2010 and applies to the Big Four accounting firms and other accounting firms that audit FTSE 350 index companies. It aims to improve the governance of large accounting firms and increase public confidence in auditing. This revision draws on the relevant provisions of the British "Corporate Governance Code", and adjusts it according to the fact that accounting firms often adopt the form of partnership. The new code is planned to be issued in 2022. It will continue to focus on the governance of accounting firms, pay more attention to the public interest, and extend the scope of application to accounting firms that audit more than 20 public interest entities (the number of public interest entities audited has decreased. It is no longer applicable when the number is less than 10).

After some well-known companies went bankrupt, the public's trust in auditing declined, and the importance of auditing and the role of auditors were therefore questioned. To this end, the British Department of Business, Energy and Industrial Strategy (BEIS) embarked on a package of reforms, including the split of consulting and auditing services, in order to restore public trust in auditing and corporate governance, including trust in the professional capabilities of accounting firms and recognition of their commitment For the efforts of high-quality audits. In this regard, accounting firms with higher levels of governance are more likely to meet the public’s expectations for high-quality audits. Therefore, the new code intends to adopt governance principles and requirements in a number of new areas to complement other public interest entities’ audit regulatory frameworks. Closely connected. The new code also sets minimum standards of governance requirements. The FRC encourages accounting firms to implement all the governance principles and requirements in the new code. If they cannot be implemented, they should provide a detailed explanation in their transparency report. For example, small accounting firms can choose to apply some of the provisions based on their size and available resources.

Specifically, the FRC intends to make amendments in the following areas: First, to address the loopholes in the 2016 version of the code and the implementation of accounting firms, strengthen relevant regulations. For example, the requirements of the 2016 version of the Code are relatively broad, leading to significant differences in the governance structure of accounting firms and the positioning of independent directors, and the new code will make consistent provisions on this. The second is to refine relevant provisions based on feedback from stakeholders on the 2016 version of the Code. For example, the 2016 version of the Code only requires accounting firms to address the major concerns of audit regulators regarding the audit business, while the new code clarifies that major concerns include leadership and governance structure, culture, executive information, risk management, internal control, etc. . The third is to reflect the latest developments in the good governance practices of accounting firms. The fourth is to delete overlapping content with laws and regulations or related guidelines in the Code. For example, the 2016 version of the Code requires accounting firms to formulate policies and procedures that require signatories of group audit reports to comply with applicable auditing standards. The new code is deleted. The fifth is to align the expressions and objectives of the Code with the international quality management standards; the sixth is to determine the relationship between independent directors and non-executive directors responsible for auditing in accounting firms that have achieved business separation (currently the "big four") The boundaries of responsibilities. Among them, independent directors are not personnel of the accounting firm. They represent the public interest and are responsible for overseeing the daily operation and management activities of the accounting firm. Therefore, one of their important duties is to alert the regulators when they believe that the accounting firm violates the public interest or affects the achievement of the goals set by the new code.

The new code also puts forward stricter requirements on accountability, culture, and sustainability. For example, in the board of an accounting firm, the majority of directors should be partners who do not undertake important management functions; referring to the clauses in the Code of Corporate Governance that clearly divide the powers and responsibilities of the chairman of the board of directors and the CEO, the new code clearly defines the chairman and management of the board of directors. /Responsibilities of senior partners to promote the board of directors to play a greater role. The FRC believes that the new code will lay a solid foundation for the future governance of accounting firms.

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American Institute of Certified Public Accountants: Reassessing audit supervision requires a balance between professionalism and independence

Recently, in response to Gary Gensler, Chairman of the US Securities and Exchange Commission (SEC), on the advice of rich, accurate and independent audit reports of listed companies, Lin Lin, Executive Director of the Audit Quality Center (CAQ) under the American Institute of Certified Public Accountants (AICPA) The article published by Julie Bell Lindsay pointed out that the accounting industry fully agrees and is ready to work with relevant parties such as the SEC and PCAOB to improve audit quality. She emphasized that the reassessment of audit industry supervision needs to find a balance between the professional knowledge and skills of auditors and their independence, so that the audit industry can fulfill its responsibility to protect the capital market.

The article stated that as the gatekeeper of the capital market, the auditor of a listed company has the responsibility to help investors evaluate whether the financial information disclosed by the listed company is true and reliable. The Sarbanes-Oxley Act has been in force for 20 years. The information disclosure system of listed companies is completely reliable. The audit quality has never reached such a high level. For example, the auditing business of accounting firms has pushed listed companies to strengthen their accounting compliance and improve the quality of financial reports, thereby greatly reducing the phenomenon of financial restatement: In 2019, the highest audit adjustment amount in the U.S. capital market was US$276 million. This is the lowest level in eighteen years. Other countries and regions have realized this and are learning from the good practices of the US financial reporting system, such as setting up an independent supervisory agency for auditors of listed companies.

The article believes that in the past two decades, the level of improvement in audit quality has far exceeded the level of regulatory reform. Accounting firms have invested a lot of resources in areas such as personnel training and technology development. Technologies including artificial intelligence and data analysis may change or even change the way of auditing practice, which has further improved the quality and effectiveness of audits. For example, with the help of technological advances, auditors have shifted from previous "sampling" inspections to more extensive and in-depth inspections of massive amounts of information, while focusing on subjective judgment areas that may lead to major misstatement risks in the audit business.

The article calls for that in view of the important responsibility of auditors to safeguard the public interest, regulatory agencies and other stakeholders may at any time put forward policy recommendations to strengthen the supervision of the audit industry. However, any such policy recommendations should undergo a cost-benefit analysis to ensure that they consolidate rather than undermine the current areas of advantage in the audit industry. For example, independence is one of the cornerstones of the audit industry and the basis for ensuring audit quality. Policy recommendations aimed at strengthening the independence of auditors (such as a total ban on accounting firms from providing non-audit services and mandatory rotation of accounting firms) need to consider how to strike a balance between the auditor’s professional knowledge and skills and their independence, otherwise they may be reduced Audit quality. CAQ found no conclusive evidence that the complete prohibition of non-audit services or the mandatory implementation of accounting firm rotation undermined the independence of auditors and reduced the quality of audits. However, CAQ found that measures to improve the independence of auditors often ignore market incentives and the possible negative impact on audit expertise and skills, which substantially undermines efforts to improve audit quality.

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Canadian Public Accountability Commission explores the use of technical means to improve audit quality

The Canadian Public Accountability Council[1] (CPAB) released a report entitled "Technology in Auditing Business" to discuss the impact of automated technology tools on audit quality.

The report states that technology is changing auditing. Auditing platforms are becoming more automated, and auditors are increasingly using automated technical tools to conduct risk assessments and perform corresponding audit procedures. This is mainly manifested in that first, the application of technology allows auditors to analyze large data sets in order to obtain more in-depth analysis, identify abnormal situations and more effectively question management's conclusions. This enhances the auditor's professional skepticism. Second, the accounting records of the audited unit are still the main source of information for auditors. However, with the help of technological progress, auditors will more easily obtain more information, including relevant internal and external information of the audited entity. Auditors can use information to reinforce the audit evidence obtained.

At the same time, the report believes that when accounting firms develop or acquire automated technical tools, they should formulate quality control policies and procedures to deal with related risks. There are two main risks. One is that the design or application of automated technology tools cannot achieve the intended purpose, and the other is that the audit business team fails to properly apply the automation technology tools.

Regarding the first type of risk, starting from 2019, CPAB will add assessment content to the annual assessment activities of the quality control system of accounting firms, focusing on the adequacy of the risk assessment procedures implemented by accounting firms in the process of developing or acquiring automated technical tools. For accounting firms that allow business teams to develop or obtain automated technical tools on their own, pay attention to whether the business teams comply with the accounting firm’s policies and procedures. For accounting firms that obtain automated technical tools from service providers, pay attention to whether such accounting firms correctly apply automated technical tools in the course of conducting audit business.

Regarding the second type of risk, CPAB requires accounting firms to monitor whether automated technology tools are properly applied in auditing business. The accounting firm should work with the audit business team to deal with related quality risks, such as formulating policies and procedures to guide the business team to discuss with qualified professionals. The partners will ultimately be responsible for whether their business team correctly applies automated technology tools in the audit process, including whether to formulate procedure manuals, conduct training, and obtain expert resources and support.

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Japan Certified Public Accountants Association publishes ``2020 Quality Control Inspection Summary''

Recently, the Japan Certified Public Accountants Association (JICPA) released the "2020 Quality Control Inspection Summary", introducing the quality control inspections of accounting firms in 2020.

According to the JICPA articles of association and its quality control inspection standards and procedures, as an important part of JICPA self-regulation, the quality control committee under JICPA conducts annual inspections of member firms, mainly including the design and implementation of the quality control system of accounting firms, and Put forward suggestions and corrective measures for the problems found in the inspection. However, such inspections are only normative and guiding work, and do not involve specific audit opinions issued by accounting firms.

In 2019, JICPA reformed its quality control inspection system. The main contents include: First, the frequency of routine inspections is more flexible. If necessary, the routine inspection activities once every three years can be shortened to once a year or extended to once every five years. The second is to relax the conditions for carrying out special inspections. Previously, the quality control committee could carry out special inspections only if the audit business affected public trust. After the reform, if the Quality Control Committee deems it necessary, special inspections can be implemented. The third is that the results of routine inspections have been reformed from previous unqualified, qualified or negative opinions to extremely major defects or major defects. Fourth, the Quality Control Committee can take corresponding measures based on the inspection results and take more stringent measures against major defects. Fifth, the accounting firm only needs to submit a rectification plan report when there are extremely major defects or major deficiencies in the quality control system. The sixth is to cancel the follow-up inspection activities. In response to extremely major defects or major defects, the Quality Control Committee will no longer carry out follow-up inspections, but will re-launch new inspection activities in the second year or guide the accounting firm to take remedial measures. Seven is to strengthen the feedback function of the Quality Control Committee, and directly report to the JICPA chairman and chairman of the problems found in the accounting firm or auditing standards during the inspection. The eighth is to introduce a consulting mechanism in the professional field, set up a professional field working group, and appoint professional ethics, accounting, information technology and other experts, so as to provide technical advice on inspection activities when necessary.

The Japanese government declared a state of emergency for epidemic prevention twice in April 2020 and January 2021. Therefore, in 2020, 56 accounting firms will undergo regular inspections. One has extremely major defects, two have major defects, 52 have no defects, and one has postponed to the next year. Thirteen accounting firms were inspected on the rectification and reforms, and 3 of them were not adequately rectified. Seven accounting firms received special inspections, one of which was inspected due to mergers, and the other 6 were inspected due to auditor rotation. No major defects were found, but the Quality Control Committee proposed 6 and 3 rectification items respectively.

In this round of inspections, there are 5 accounting firms that have implemented inspections in 2020 less than 3 years from the last inspection, and there are 29 accounting firms that have been postponed to 2021 and subsequent annual inspections after 3 years from the most recent inspection. Family. In terms of the number of audited listed companies, among the audited accounting firms, 2 audited more than 100 listed companies, 3 audited 20-99 listed companies, 3 audited 10-19 listed companies, and 30 audited There are less than 10 listed companies and 18 unaudited listed companies.

In 2020, the Quality Control Inspection Committee issued a total of 57 regular inspection reports (including inspection items that were not completed in 2019) of accounting firms, involving 148 auditing operations. Among them, 53 accounting firms had no major deficiencies, involving 143 businesses; 4 accounting firms had major deficiencies, involving 5 engagements. The Quality Control Inspection Committee put forward 39 rectification items at the quality control system level of accounting firms and 299 rectification items at the audit business level, as shown in the following chart.

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The Hong Kong Financial Reporting Bureau conducts inquiries and investigations on the continuing operations of the Evergrande Group's financial reports

The Hong Kong Financial Reporting Council (FRC) announced that through market supervision activities and based on public complaints, it has discovered Evergrande Group’s financial reports for the year ended December 31, 2020 (2020) and June 30, 2021 (semi-annual) There is a problem with the adequacy of the report on going concern matters. To this end, Hong Kong FRC will conduct inquiries on Evergrande Group’s 2020 financial report and 2021 semi-annual financial report, as well as on the audit of Evergrande Group’s 2020 financial report by PricewaterhouseCoopers (the 2020 audit) survey.

Hong Kong FRC pointed out that in the 2020 financial report, Evergrande Group mentioned the financing activities to manage its liquidity risk and capital structure, and proposed an alternative plan to buffer the impact of potential cash flow. However, as of the end of 2020, Evergrande Group reported cash and cash equivalents of 159 billion yuan, but did not cover its current liabilities of 1.507 trillion yuan; it also did not report borrowings of up to 167 billion yuan due in 2022; not to mention that in 2020 The annual financial report clarified whether there will be major uncertainties in continuing operations before and after the implementation of the replacement plan. PricewaterhouseCoopers issued an unqualified opinion in the 2020 annual audit report of Evergrande Group, but did not mention the major uncertainties of continuing operations. In addition, in the 2021 semi-annual financial report, Evergrande Group has not yet clearly stated whether there is a major uncertainty in going concern; nor has it stated whether the directors’ judgment on the basis of going concern is appropriate, and if appropriate, whether the judgment is significant.

Hong Kong FRC mainly inquired about Evergrande Group. In its 2020 financial report and 2021 semi-annual financial report, the first is about whether the assessment of going concern matters complies with the requirements of applicable financial reporting standards; the second is about the uncertainty of going concern And whether the disclosure of the accounting basis applied to it complies with the requirements of the applicable financial reporting standards. At the same time, the Hong Kong FRC mainly investigates whether PricewaterhouseCoopers' assessment of going concern matters and the auditor's report issued by it in the 2020 audit comply with applicable auditing standards. The Hong Kong FRC stated that it will release information about the inquiry and investigation when necessary.

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International Federation of Accountants released the "Progress of Sustainability Report Assurance"

Recently, the International Federation of Accountants (IFAC) and the International Association of Certified Professional Accountants (AICPA|CIMA) jointly issued the "Sustainability Report Assurance Progress" to understand the extent to which companies disclose sustainability information and what assurance standards they adopt Type of certification and certification service organization. 1,400 companies from 22 countries and regions participated in the survey.

Generally speaking, there are more companies that disclose sustainability information such as environment, society and governance (ESG), but relatively few companies conduct certification on sustainability reports. Ninety-one percent of the companies surveyed disclosed sustainability information to a certain extent, but only 51% of the companies attested to sustainability reports, and about 63% of the attestation services were undertaken by accounting firms or their affiliated institutions.

From a regional point of view, there are obvious differences in sustainability reports and their certification between countries and regions. Among the surveyed companies, companies from the European Union accounted for the highest proportion, especially in France. The percentages of companies that disclosed sustainability information and verified sustainability reports were 100% and 96% respectively; Saudi Arabian companies The lowest percentages are 52% and 7.7% respectively; in Mainland China and Hong Kong Special Administrative Region, the percentages of companies that disclose sustainability information are 79% and 96%, respectively, but the percentages of companies that verify sustainability reports The proportions are less than 30%.

In terms of industry types, the basic materials industry has the highest proportion of companies that verify sustainability reports, reaching 65%; the real estate industry has the lowest proportion of relevant companies, at 37%.

Judging from the standards and forms adopted, the sustainability report and its assurance lack consistent standards. Companies disclose their sustainable development information through the Global Reporting Initiative (GRI) standards, the Sustainable Development Accounting Standards Board (SASB) standards, the United Nations Sustainable Development Goals (SDG), the United Nations Global Compact (UNGC) and other standards. The reporting format has not yet been unified. Approximately 57% of the surveyed companies use the sustainable report format, 18% of the companies use the annual report format, and 16% of the companies use the comprehensive report format. Significant progress will be made in the consistency and rationalization of the sustainability report in 2020. The International Financial Reporting Standards (IFRS) Foundation initiated the establishment of the International Sustainability Standards Board (ISSB).

The assurance business for sustainability reports also lacks consistent standards. Among them, 88% of the assurance services undertaken by accounting firms apply the International Assurance Standards (ISAE) No. 3000. The assurance level of the attestation business has not yet been unified. Among all the attestation reports, 83% adopt the form of attestation with limited guarantee. Among them, the certification services undertaken by accounting firms all adopt the form of limited guarantee certification.

IFAC pointed out that company reports are changing rapidly. The public is paying more and more attention to how companies comprehensively report financial information, environmental, social and governance (ESG) information and other sustainability information, as well as broader non-financial information. In particular, investors and other stakeholders increasingly need high-quality sustainable development information, hoping and even requiring disclosure entities to provide it. Therefore, the corporate board of directors must take responsibility for overseeing the collection and disclosure of high-quality sustainable development information.

IFAC emphasizes that the assurance business of sustainability reports will ensure that relevant parties obtain high-quality sustainability information. It should be carried out by professional accountants, because professional accountants have the required skills, qualifications, experience and professional ethics to safeguard the public interest. obligation. Only when these conditions are met at the same time can we carry out meaningful assurance services and promote public trust in sustainable development information.

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