Support for smaller audit firms in the UK
The Financial Reporting Council (FRC) in the UK has announced new supervision measures to support smaller audit firms seeking to grow their share of the audit market without compromising audit quality.
Tier 2 and Tier 3 firms audit a minority of listed companies and other public interest entities (PIEs) within the FRC’s regulatory scope. However, their share of the market has recently grown from 9% to 13%, partly as a result of the larger Tier 1 firms de-risking their audit portfolios.
From 2016/17 to 2021/22 the FRC reviewed 51 audits at Tier 2 and Tier 3 firms and found that 67% of them required more than limited improvements. This compares with 27% for the larger Tier 1 firms over a comparable period. The regulator published a separate report on Tier 2 and Tier 3 inspection and supervision for the first time in 2022.
Most significant quality issues involve inconsistent application of professional scepticism and challenge
The FRC intends to launch a new initiative, an Audit Firm Sandbox, which will include bespoke measures to help smaller firms taking on PIE audits and those scaling up the number or complexity of PIEs they audit.
Auditor scepticism
The FRC has published a report setting out examples of good practice to improve auditor scepticism and challenge. The regulator says the most significant quality issues identified over a number of years involve the inconsistent application of professional scepticism and challenge, resulting in the poor application of professional judgment. The report summarises what ‘good’ looks like and provides examples of good practice from the FRC’s ongoing supervision work. The FRC has also published a report by Britain Thinks on audit firm culture.
Audit reference
Most auditors include the description of an audit in their standard audit report; however, some simply reference the standard description on the Irish Auditing and Accounting Supervisory Authority (IAASA) website. IAASA recently redesigned its website and therefore where a reference is made it needs to change to the new wording provided. On the redesigned website the auditing standards have also moved.
UK audit licences
One Irish resident ACCA auditor holding a UK audit licence and a number of UK resident auditors were recently informed of the need to register directly with the FRC for their public interest entity audits. The new requirements came into effect on 5 December 2022 and will require firms and individuals who undertake statutory audit work for PIEs in the UK to be registered on the PIE Audit Register. The rulebook changes reflect this new requirement.
Accountants need to be aware of the risks and red flags that a client or business is involved in human trafficking
EFRAG updates
The European Financial Reporting Advisory Group (EFRAG) issues a monthly update newsletter.
UK AML reporting
The latest edition of the UK Financial Intelligence Unit’s SARs Reporter Booklet is now available. It provides some examples of the work of law enforcement agencies in utilising suspicious activity reports intelligence in investigations.
Human trafficking
Accountants need to be aware of the risks and red flags that a client or business is involved in human trafficking into Ireland. Some of the risk factors to consider include multiple mobile phones and mobile phone top-ups; short-term tourist-type rental properties rented by the same individual multiple times; small payments to foreign internet service providers (for advertising); multiple flight bookings; multiple car rental and taxi fares; rental of residential property; and the use of money transfer agents.
Russian sanctions
The EU has imposed additional restrictions on trade with Russia and has now imposed sanctions aimed at the export of oil from the country. Also targeted are steel, wood pulp and paper, cigarettes, plastics and cosmetics, while there is a full ban on the provision of crypto-asset wallet, account or custody services to Russian persons and residents, regardless of the total value of those crypto-assets.
In addition to the earlier ban on accounting and audit services, there is also a prohibition on the provision of architectural and engineering services, as well as IT consultancy services and legal advisory services to Russia. More details are available.
Clarification has still not been received on the exact scope of the restrictions on the provision of accounting, audit and tax services to persons and businesses established in Russia. What is clear is that it is an offence in Ireland to provide such services to a Russian national with an establishment in Russia, and this includes an indirect service such as the audit of a Russian-owned, Irish-registered company.
Accounting practices will need to ensure that they are sanction-checking their clients prior to undertaking any work and are able to demonstrate that the client was not a sanctioned person or business. There are international subscription databases to sanction-test clients, while the Central Bank and others provide sanctioned-person lists on their websites.
Accounting practices will also need to be aware of a client possibly breaching sanctions and be ready to report them. ACCA’s dedicated Ukraine hub has information and support on sanctions and dealing with uncertainty.
