IAASA – Functions and
proposed approach
Michael Kavanagh
Head of Financial Reporting Supervision
Presentation Overview
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Brief history and overview of the 2003 Act
IAASA Board
Objects and functions of IAASA
Supervision of Accountancy Bodies
Financial Reporting Supervisory function
Review Constituency
Funding and the Reserve Fund
A Brief History
• RGA (2000) - Terms of reference included an examination of, inter
alia:
– whether self regulation of the accountancy profession was working
effectively and consistently;
– auditor independence; and
– role of the auditor in ensuring companies’ compliance with law and
regulations
• RGA recommended, inter alia,
– establishment of an Oversight body;
– Financial reporting review function; and
– requirement for Directors’ Compliance Statements.
The 2003 Act
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Recommendations of the RGA accepted by Government in December 2000.
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RGA’s recommendations given the force of law by the Companies (Auditing
and Accounting) Act, 2003.
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The 2003 Act deals principally with:
– the establishment of IAASA; and
– ‘Other Measures to Strengthen the Regulation of Auditors’, including:
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statutory backing for accounting standards;
audit committees;
disclosure of accounting policies;
disclosure of auditors’ remuneration (analysed by audit, audit related and non-audit); and
Directors’ Compliance Statements.
IAASA Board
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Company ltd. by guarantee - Board will comprise 15 directors, nominated
thus:
– 2 (including the Chairperson) nominated by the Minister;
– 3 nominated jointly by the prescribed accountancy bodies;
– 9 nominated by the following bodies (1 each):
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IBEC
IAIM
Pensions Board
Revenue
Law Society
ICTU
ISE
IFSRA
DCE
– Chief Executive
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A maximum of 5 of the 15 directors may be members of prescribed
accountancy bodies.
Statutory Remit
• To supervise how the prescribed accountancy bodies regulate and
monitor their members;
• To promote adherence to high professional standards in the auditing &
accountancy profession;
• To monitor whether the accounts of certain classes of companies and
other undertakings comply with the Companies Acts; and
• To act as a specialist source of advice to the Minister on auditing and
accounting matters.
Functions
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The Authority’s principal functions will include:
– Promoting adherence to the highest standards in the profession;
– Reviewing the financial statements of certain companies and other undertakings;
– Considering applications for recognition for audit purposes;
– Supervising the manner in which the accountancy bodies monitor (including work
quality) and regulate (including investigation and disciplinary functions) their
members;
– Where deemed appropriate, conducting investgations into bodies and/or members.
– Co-operating in the development of auditing and ethical standards.
Supervision of Accountancy
Bodies
Prescribed Bodies
• Bodies recognised under the 1990 Act for audit purposes (i.e. ACCA,
ICAEW, ICAI, ICAS, ICPAI, IIPA); and
• any other body prescribed by the Minister (other bodies that may be
prescribed include AIA, CIMA and CIPFA).
• Board currently examining the issue of prescription.
Supervision of Accountancy Bodies
• The Authority’s statutory remit, insofar as it directly relates to the
prescribed bodies, can be broadly divided into the following
categories:
– Approval;
– Supervision; and
– Investigation/enforcement.
Approval
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The Authority’s approval functions include:
– Approval of bodies’ constitutions, bye-laws, regulations and standards,
together with any subsequent amendments thereto.
– Granting of recognition of accountancy bodies for audit purposes.
– The attachment of conditions to recognition.
– Pre-approval of bodies’ regulatory and monitoring plans.
Supervision
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The Authority’s supervisory functions include:
– Supervision of the investigation and disciplinary procedures of each
prescribed body, including by requiring access to its records and by
requiring explanations about the performance of its regulatory and
monitoring duties.
– Supervision of how each recognised accountancy body monitors its
members and the performance of ‘section 25 reviews’ of those members.
– Section 25 provides for the review of members of recognised bodies for
the purposes of determining whether the body in question is, or has been,
regulating its members in the manner approved.
– Review of bodies’ reports on their regulatory and monitoring activities.
Investigation/Enforcement
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To conduct enquiries under section 23 into whether a prescribed body has
complied with its approved investigation and disciplinary procedures.
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Where not satisfied that a prescribed body has complied with its approved
investigation and disciplinary procedures, the Authority may impose sanctions
on that body.
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To undertake investigations under section 24 into possible breaches (by a
member) of the standards of a prescribed body.
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Where a member is found to have committed a breach of a body’s standards ,
the Authority may impose any sanction available to the body on the member.
Powers & Sanctions
Section 23
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The Authority may, for the purpose of determining whether a prescribed body has
complied with its approved investigation and disciplinary procedures, enquire into:
– A decision not to undertake an investigation;
– The conduct of an investigation;
– Any other decision by a body in relation to a possible breach by a member.
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For the purpose of such an enquiry, the Authority may:
– Inspect, and take copies of, all relevant documents in the possession or control of a
body; and
– Require a body to explain why it reached a decision referred to above and/or to
explain how it conducted its investigation.
Objectives
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In discharging its remit, the Authority will seek to achieve the following
objectives:
– To enhance confidence in the regulatory and monitoring processes
governing members of the auditing and accountancy profession;
– To protect and promote the public interest through effective, independent
oversight; and
– To ensure the constitutions, bye-laws, regulations and standards of the
prescribed bodies conform to a common high standard consistent with
international best practice.
Approach
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In discharging its functions, the Authority will adopt the following approach:
– Each prescribed body will be the subject of a thorough initial review.
– As part of that review, each body’s systems, practices and procedures etc.
will be ascertained and documented.
– Confirmation of the accuracy of the Authority’s understanding of each
body’s systems, practices and procedures will be sought.
Approach
– Reviews will include examination of:
• Constitutions/Memorandum & Articles etc.;
• Bye-laws;
• Regulations;
• Rules of Professional Conduct;
• Ethics;
• Applicable Standards;
Financial Reporting Review
Function
Compliance with the Companies
Acts and the IAS Regulation
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In monitoring whether financial statements have been prepared in accordance with
company law and, where applicable, the IAS Regulation, relevant considerations will
include, inter alia:
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prescribed formats;
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statutory disclosure requirements;
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adherence to ‘applicable accounting standards’ and, in cases of departure from same, disclosure
of requisite detail;
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any matters to which members’ attention has been drawn in auditors’ reports;
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where applicable, the requirements of IAS/IFRS, as adopted by the EU.
Authority’s Review Constituency
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The Authority’s review constituency comprises:
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all plcs (whether listed or not);
all subsidiary undertakings of plcs;
all private companies limited by shares that, in both in the relevant financial year and the
immediately preceding financial year, satisfy the following criteria:
• balance sheet total exceeds €25m; and
• turnover exceeds €50m.
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all private companies limited by shares which, when aggregated with their subsidiary
undertakings, exceed the aforementioned thresholds;
all subsidiary undertakings of the preceding class of private companies; and
certain other undertakings, and where applicable their subsidiary undertakings, that satisfy the
aforementioned criteria, including unlimited companies and partnerships whose members
having unlimited liability are themselves limited companies.
Relevant Exemptions
• The 2003 Act allows for the Minister to exempt certain
companies on the basis that these companies are regulated
under other enactments.
• Potential exemptions for –
• Financial regulator (IFSRA) regulated entities
• securisation vehicles
Proposed Approach to
Financial Statement Supervision
• Act suggests a proactive rather than reactive approach to monitoring;
• Risk based selection methodologies will be employed which may, for
example, give rise to:
– entity/group specific reviews; and/or
– issue/sectoral specific reviews.
• Emphasis will be on instances of material non-compliance.
Enforcement
• Issues, other than those resulting in a restatement of financial
statements or notification to the Registrar, will be dealt with on a
confidential basis;
• Where appropriate, the Authority is likely to seek to resolve issues
arising through dialogue with affected parties – audit committees likely
to have a key role in such contacts;
• However, where, in the Authority’s view, a more formal approach is
warranted, section 26 of the Act provides a formal enforcement
mechanism.
Enforcement
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In circumstances where there is, or may be, an issue regarding a set of financial
statements’ compliance with the Companies Acts or the IAS Regulation, and those
financial statements have been:
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disseminated to members in advance of the AGM; or
laid before the AGM; or
delivered to the Registrar
the Authority may give notice to the directors of the entity concerned.
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The aforementioned notice must specify:
– the matters in respect of which it appears to the Authority that a question of noncompliance arises; and
– a period of not less than 30 days in which the directors are required to furnish the
Authority with an explanation of the financial statements or prepare revised
financial statements.
Enforcement
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In the event that, at the end of the specified period, the directors have neither, in the
Authority’s opinion, given a satisfactory explanation nor revised the financial
statements, the Authority may apply to the High Court for a declaration of noncompliance and associated orders.
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If, having considered the matter, the High Court is satisfied that an instance of noncompliance exists, the Court may make a declaration to that effect and may, inter alia;
order the following:
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the revision of the financial statements and/or directors’ report;
the re-audit of the financial statements;
that the directors take specified steps to bring the Court order to the notice of persons likely to
rely on the financial statements;
that the Authority’s, and reporting entity’s, costs be awarded against the directors (in that
context, every person who was a director at the time the financial statements were approved is
considered to have been a party to that approval unless s/he can show that they took all
reasonable steps to prevent approval (section 26(9)).
Enforcement
• In the event of an application being made to the High Court, the
Authority is required to furnish the CRO with:
– notice of the application; and
– a general statement of the matters at issue.
• On the conclusion of proceedings, the Authority is required to furnish
the CRO with:
– a copy of the Court Order; or
– notice that the application has failed or has been withdrawn.
Consistent Enforcement
of IFRS in the EU
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The IAS Regulation provides, inter alia, that a proper and rigorous enforcement regime
is key to underpinning investors’ confidence in financial markets and, in that context,
that‘…the [EU] Commission intends to liaise with member States, notably through the
Committee of European Securities Regulators (CESR), to develop a common approach
to enforcement.’
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To that end, CESR has established an enforcement co-ordination forum, at which the
Authority is represented;
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Through that forum, a database of member States’ enforcement decisions regarding
IFRS will be established.
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While not having the strict status of precedents, these decisions will serve to inform
other enforcers’ deliberative and decision making processes.
Funding
• The Act provides that:
- the exchequer will provide 40% of the Authority’s funding; and
- the remaining 60% will be provided by the profession (by way of a
levy on the prescribed bodies).
• Bodies contribution likely to be in the order of €1.4m for 2006
• Bodies and IAASA have agreed a model for apportioning every bodies
contribution.
Funding
• Two Aspects to funding –
- Day to day operation of IAASA
- Reserve Fund
The ‘Reserve Fund’
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Section 15 of the Act requires the Authority to establish and maintain a Reserve Fund.
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The purposes of the Fund is twofold, namely to discharge the costs associated with:
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enforcement in instances of non-compliance of financial statements with the Companies Acts
and, where applicable, Article 4 of the IAS Regulation; and
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investigations into possible breaches of an accountancy body’s standards etc. by a member.
For the purposes of resourcing the Fund, in addition to the funding provided by the
exchequer and accountancy bodies respectively, the Act allows the Authority to levy
those entities, or subsets thereof, coming within its financial statement review remit.
The ‘Reserve Fund’
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However, prior to the imposition of a levy on the affected entities, the
Authority is required to:
– consult with any persons who are interested in the matter;
– establish criteria for apportioning the levy among those classes of undertakings
affected; and
– obtain the Minister’s consent for the proposed apportionment model.
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The Interim Board is of the view that, after a period of three years, the Fund
balance should be of the order of €500k.
Co-operation with Other Countries’
Relevant Authorities
• The Authority is also in ongoing contact with other constituent bodies
of the FRC (e.g. AIDB, AIU, FRRP).
• PCAOB – the US Authorities have been furnished with a copy of the
Authority’s Work Programme and contacts are ongoing with a view to
ensuring that the PCAOB will be in a position to derive a satisfactory
level of assurance from IAASA’s work.
• EU – In preparation for the transposition of the Revised 8th Directive
into domestic law, the EU is facilitating arrangements for co-operation
and information sharing between Member States’ relevant Authorities.
• International – IAASA is a party to current initiatives to establish an
international forum of audit regulators.
Current Activities
• Preparation/planning for visits to the accountancy bodies;
• Detailed analysis of financial statement review constituency;
• Recommendations recently made to the Minister regarding
Prescription;
• Examination of an application for Recognised Body status;
• Ongoing development of policies and procedures;
• Memberships: EECS, CLRG;
• Observer status: APB, ASB.
Timeframe
• Majority of professional staff have been recruited at this stage.
• Authority’s offices due for completion by year end (Naas, Co.
Kildare).
• Commencement of those aspects of the Authority’s remit pertaining to
the supervision of the profession in January 2006.
• Ministerial prescription of additional bodies, in the event that this is the
Minister’s decision, shortly thereafter (contingent upon timetable of
the Houses of the Oireachtas).
• Commencement of S26 etc. on completion of requisite analyses and
consultations.
Further Information
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Further information on the Authority and its activities may be obtained from:
IAASA
3013 Lake Drive
Citywest Business Campus
Dublin 24
+353 (0)1 469 3702
[email protected]
www.iaasa.ie
End of Presentation
Thank You