When it comes to regulation and compliance, a ‘them and us’ approach can only work to the detriment of practitioners, argues Steve Collings.
Accounting firms today are subject to increasingly burdensome legislation which has made making a living and 'doing things right' even more difficult for many practitioners. With revised and redrafted International Standards on Auditing (ISAs) coming in very soon, talks of IFRS for SMEs being introduced shortly and the constantly changing tax legislation, are practitioners (particularly the smaller ones) facing 'regulation overload'? Crucially, will all this regulation force smaller practitioners (particularly sole practitioners) to throw in the towel?
Regulatory compliance and the '80/20' concept
Over the last year I have addressed a number of accountants in practice on various financial reporting problems and have also published articles concerning the difficulties practitioners in the profession face – particularly sole practitioners – with regards to technical compliance. These technical difficulties polarise accountants, with some having no idea what version of FRSSE we are currently using, or even failing to understand the form and content of a set of abbreviated financial statements, let alone the disclosure requirements in the full financial statements. There are also those who, whilst not producing 100% technically correct financial statements, have an 80/20 approach (where 80% is correct and 20% is potentially incorrect).
Professional regulators are extremely keen to ensure that member firms uphold standards and produce work which is in accordance with regulatory frameworks (for example whether an audit assignment has been undertaken in accordance with ISAs).
It goes without saying that if you hold a professional qualification (such as ICAEW/ACCA) then you are bound by the relevant professional body’s rules and any breach of these rules could result in disciplinary action and in a large majority of cases, these rules are often complied with/by member firms and individuals. However, in some cases firms are criticised for failing to uphold the standards of work which professional bodies demand from their members. In many cases, firms and individuals are subjected to disciplinary action, the outcomes of which could be a fine and subsequent visits to ensure improvements are being made to more serious disciplinary actions such as removals of audit registration and even exclusion from membership.
Professional regulation
Undoubtedly, the role of the regulator (such as QAD officers and ACCA monitoring officers) is to help firms identify weaknesses in their procedures, highlight improvements that can be made within audit and non-audit files and such compliance visits are an opportunity for the practitioner(s) to discuss other aspects of their practice they consider necessary with the regulator.
Comments I have received from professional accountants concerning the professional regulators and certainly some of the members' views on AccountingWEB.co.uk suggest that the regulators, in some cases, are not always right when it comes to criticising firms and where firms believe that the regulator may be inappropriately criticising a matter which could either be open to interpretation or misunderstood by the regulator, then they should challenge the criticism accordingly.
Practitioners' problems with regulators
Below are some comments/cases I have received from practitioners with regards to their regulators. (Please note: the following are experiences of other firms/practitioners and the accuracy of the instances on the part of the regulator or practitioner have not been verified):
- One regulator said that a defined contribution pension scheme is, in fact, a defined benefit pension scheme. The differences between the two are fundamental and it will usually be evident that a defined benefit scheme is such. In defined benefit schemes the risk of poor investment performance lies with the company, whereas an employer's liability in a defined contribution scheme is limited to the contributions it has agreed to pay.
- Another regulator criticised a firm for including a cashflow statement for a FRSSE client (FRSSE encourages but does not mandatorily impose a cashflow statement). If the client wishes to include a cashflow statement, this should not be a criticism.
- One firm preparing financial statements under IFRS was informed that recognising actuarial changes immediately through profit and loss in respect of a long-term bonus scheme was incorrect. Long-term bonus schemes under IAS 19 'Employee Benefits' are accounted for in the same way as defined benefit pension benefits including the use of the Projected Unit Credit Method. IAS 19 at paragraph 127 states that the exception is that actuarial gains and losses are recognised immediately through profit or loss as well as past service costs being recognised immediately.
- One regulator cited a contract being onerous, when it had not become onerous. Many contracts can be cancelled without any compensation being paid to the other contracting party and as no obligation can arise on cancellation, such a contract cannot be onerous.
Regulators' criticisms of practitioners
Conversely, some practitioners have received appropriate criticism from regulators and such instances have been:
- Failing to test income for completeness using the correct source document. In many cases customers will submit a purchase order initiating the transaction – such tests should start from this and not the sales invoice.
- Incorrect recognition of a contract loss on a non-audit client. Under SSAP 9 'Stocks and Long-Term Contracts' and IAS 11 'Construction Contracts' losses on contracts should be recognised as soon as they are foreseen.
- Inadequate documentation of client discussions. 'Inquiry' is a procedure under ISA 500 'Audit Evidence' and complements other audit procedures so sufficient documentation of such discussions should take place.
- Failing to consider whether effective two-way communication between auditor and client has been adequate to yield an effective audit (ISA 260 paragraph 17.2).
- Insufficient and/or inappropriate audit evidence on file to support the opinion in the auditors' report.
- The letter of representation signed before the date of the auditor's report.
- Failing to perform analytical procedures at the end of an audit (per ISA 520 paragraph 13).
- Too much audit work performed on immaterial areas.
- Failing to maintain sufficient working papers on non-audit assignments.
Bridging the 'expectation gap'
In many cases, practitioners welcome professional regulators and view the visit as an opportunity to learn from the experience. However, I have come across instances in the past where practitioners have accused the regulators of being too 'heavy-handed' in their approach to their visits, especially where weaknesses are identified. This is the gap that needs bridging because a 'them and us' divide will only work to the detriment of all practitioners.
Steve Collings FMAAT FCCA DipIFRS is the audit and technical director at Leavitt Walmsley Associates Ltd and a partner in AccountancyStudents.co.uk. He is also the author of 'The Core Aspects of IFRS and IAS' and lectures on financial reporting and auditing issues.