Financial Reporting Supervision Function of IAASA

Michael Kavanagh

Head of Financial Reporting Supervision

Presentation Overview

• Brief history and overview of the 2003 Act

• IAASA Board

• Objects and functions of IAASA

• Financial Reporting Supervision function

• Review Constituency

• Funding and the Reserve Fund

• Other activities of Financial Reporting Supervision unit

Irish Auditing and Accounting Supervisory Authority (IAASA)

Financial Reporting Supervision Function is part of IAASA so who are IAASA and what are its functions ………………………?

A Brief History• RGA (2000) - Terms of reference included an examination of

– 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• Recommendations of the RGA accepted by Government in December 2000.

• RGA’s recommendations given the force of law by the Companies (Auditing and Accounting) Act, 2003.

• The 2003 Act deals principally with:

– the establishment of IAASA; and

– ‘Other Measures to Strengthen the Regulation of Auditors’, including:• 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• Company ltd. by guarantee - Board comprises 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):

• IBEC ICTU• IAIM ISE• Pensions Board IFSRA• Revenue DCE• Law Society

– Chief Executive

• A maximum of 5 of the 15 directors may be members of prescribed accountancy bodies.

Commencement• Those sections of the Act necessary to permit the

establishment of the Authority were commenced on 20 December 2005 (S.I. No. 791 of 2005).

• Requisite Ministerial designation occurred on 3 January, from which date the Supervisory Authority came into formal existence.

• Many of the Authority’s statutory functions and powers were commenced on 3 February 2006 (S.I. No. 56 of 2006)

Statutory Remit (S8)• 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, where applicable, Article 4 of the IAS Regulation [reference to IFRS inserted by S.I. No. 116 of 2005]; and

• To act as a specialist source of advice to the Minister on auditing and accounting matters.

Functions• 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;

– Co-operating in the development of accounting standards and practice notes;

– 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.

Brief outline of IAASA function re: Supervision of Accountancy Bodies

Prescribed Bodies• Bodies recognised under the 1990 Act for audit purposes (i.e. ACCA,

ICAEW, ICAI, ICAS, ICPAI, IIPA); and

• Bodies prescribed by the Minister (AIA, CIMA and CIPFA).

• The effect of Prescription is to:

– bring prescriptees within the Authority’s supervisory remit; and

– require prescriptees to contribute towards the Authority’s funding

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

• 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• The Authority’s supervisory functions include:

– supervision of the operation of each prescribed body’s complaints, investigation, disciplinary and appeal procedures;

– supervision of how each recognised accountancy body monitors its members;

– the performance of section 25 reviews of members (reviews for the purposes of determining whether the body in question is, or has been, regulating its members in the manner approved; and

– ex-post review of bodies’ reports on their regulatory and monitoring activities and requiring explanations for variances between planned and actual activity.

Investigation/Enforcement

• To conduct enquiries under section 23 into whether a prescribed body has complied with its approved investigation and disciplinary procedures.

• Where not satisfied that a prescribed body has complied with its approved investigation and disciplinary procedures, the Authority may impose sanctions on that body.

• To undertake investigations under section 24 into possible breaches (by a member) of the standards of a prescribed body.

• 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 & SanctionsSection 23

• 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.

• 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• 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.

Financial Reporting Supervision Function

Principal functions of Financial Reporting Review Unit

• To monitor whether the accounts of certain classes of companies and other undertakings comply with the Companies Acts and IAS Regulation

• Developing policy regarding the imposition of levies on the Authority’s

financial statement review constituency

• Assisting the Board to discharge its functions as an advisor to the Minister on accounting related matters

• Identifying, and maintaining under review, the composition of the Authority’s financial statement review constituency

• Liaising with other countries’ financial reporting monitoring bodies

• Co-operating in the development of accounting standards and practice notes

Compliance with the Companies Acts and the IAS Regulation

• In monitoring whether financial statements have been prepared in accordance with company law and, where applicable, the IAS Regulation, relevant considerations will include,

– prescribed formats;

– statutory disclosure requirements;

– adherence to ‘applicable accounting standards’ and, in cases of departure from same, disclosure of requisite detail;

– any matters to which members’ attention has been drawn in auditors’ reports;

– where applicable, the requirements of IAS/IFRS, as adopted by the EU.

Authority’s Review Constituency• The Authority’s review constituency comprises:

– 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.

– 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 / S15 Levy

• Act provides potential exemptions for:

• certain entities already subject to, what in the Minister’s opinion, is an appropriate level of supervision/regulation; and

• S110 TCA ’97 entities (securitisation vehicles).

• Authority has commissioned research to establish the scale of the constituency.

Proposed Approach toFinancial 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• 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:

– 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.

Enforcement

• The aforementioned notice must specify:

– the matters in respect of which it appears to the Authority that a question of non-compliance 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• 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 non-compliance and associated orders.

Enforcement• If, having considered the matter, the High Court is satisfied that an

instance of non-compliance exists, the Court may make a declaration to that effect and may, inter alia; order the following:

– 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 Enforcementof IFRS in the EU

• 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.’

• To that end, CESR has established an enforcement co-ordination forum, at which the Authority is represented;

• Through that forum, a database of member States’ enforcement decisions regarding IFRS will be established.

• 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 and IAASA have agreed a model for apportioning every bodies contribution.

Budget & Funding - 2006

• Total budget – 2006: €2.297m, provided thus:

– Exchequer 919,000– ICAI 757,000– ACCA 233,000– ICPAI 170,000– CIMA 96,000– IIPA 54,000– ICAEW 21,000– AIA 18,000– CIPFA 15,000– ICAS 14,000

Funding

• Two Aspects to funding –

- Day to day operation of IAASA

- Reserve Fund

The ‘Reserve Fund’

• Section 15 of the Act requires the Authority to establish and maintain a Reserve Fund.

• The purposes of the Fund is twofold, namely to discharge the costs associated with:

– enforcement in instances of non-compliance of financial statements with the Companies Acts and, where applicable, Article 4 of the IAS Regulation; and

– investigations into possible breaches of an accountancy body’s standards etc. by a member.

Relevant Exemptions / S15 Levy• Authority developing policy options on S15 levy.

• Considerations include:

– risk;– impact;– cost/benefit considerations; and– legal advice received by the Authority.

• Complexities include:

– private companies’ turnover and total assets figures not captured by CRO. Therefore, a large scale manual exercise is required;

– S17 guarantees;– filers of ultimate group financial statements;– identity of S110 companies.

• Public consultation will be undertaken by the Authority.

Other functions

• Assisting the Board to discharge its functions as an advisor to the Minister on accounting related matters – ASB observer status, Liason with IASB, advice on various matters as have arisen

• Liaising with other countries’ financial reporting monitoring bodies – member of EECS

• Identifying, and maintaining under review, the composition of the Authority’s financial statement review constituency

• Co-operating in the development of accounting standards and practice notes

Further Information

• Further information on the Authority and its activities may be obtained from:

IAASA2nd Floor, Willow House

Millennium ParkNaas

Co. Kildare

Tel: +353 (0)45 983600 Fax: +353 (0)45 983601Email: info@iaasa.ie Web: www.iaasa.ie