FRC consultation on publicly available audit quality indicators

The Financial Reporting Council (FRC) issued a consultation on 22 June 2022 on publishing audit quality indicators (AQIs) for the largest UK audit firms. This would provide users of audited information with greater detail on audit firms’ efforts to deliver high quality audit.

There is currently limited available information that compares audit quality between firms. Setting out AQIs to enable discussions between Audit Committee Chairs (ACCs) and audit firms on the drivers of audit quality would help ACCs make more informed comparisons between firms when appointing external auditors.

The 11 proposed AQIs would provide stakeholders with comparable indicators on perceived culture within an audit firm, audit quality inspection results, staff workloads and the level of partners’ involvement in individual audits.

FRC executive director of supervision Sarah Rapson said: “Stakeholders have been clear there is a need for concise and comparable audit quality indicators to improve transparency and drive audit quality improvements.

Greater transparency and comparability will further help to shine a light on firms’ efforts to deliver high quality audit. We welcome stakeholders’ further views on what indicators will most assist in driving the audit quality conversation between users and the firms.”

The deadline for responses to the consultation is 18 August 2022.

Subject to consultation responses, the FRC proposes that firms start collecting data for the selected AQIs from 1 April 2023 (if not already doing so). This is with a view to reporting them to the FRC by the end of May 2024, for publication shortly after.

Caution remains amid fuel protests and high cost of living

Whilst the FTSE 100 gains ground in early trade, cost of living soars.

Hargreaves Lansdown senior investment and markets analyst Susannah Streeter writes that the FTSE 100 was gaining ground in early trade at the start of this week. A late surge on markets in Asia saw the Nikkei in the Japan and Shanghai composite head higher and the Hang Seng in Hong Kong moved towards positive territory. Markets in Europe opened higher.

Energy giants were among the big rises with oil remaining elevated around $112 a barrel for Brent crude. Supply concerns persist for them.

In the UK, the cost-of-living crisis continues to lead to protests, with disruptions now affecting road networks. Due to motorists demanding help with high prices, ‘go-slow’ protests will affect motorways. This upheaval follows last month’s rail network strikes and mass cancellations at airports.

However, the UK’s higher prices pale in comparison to other nations’ situations. Streeter writes: “Turkey’s inflation rate has hit 73.5% year on year, its highest in 23 years, as the country struggles to deal with soaring food and energy prices. Sri Lanka has ground to a halt, unable to pay for fuel imports as it grapples with hyperinflation and an economic crisis. As investors fret about a hard landing in the US, some nations have already hit the concrete, and with little respite in sight for high energy prices, there will be no easy exit strategy.”

There are also still central worries about the impact of a prolonged US recession. Inflation remains high and there is concern that the US Federal Reserve will have to focus highly on increasing interest rates to bring the spiralling prices under control.

Streeter writes: “Friday’s key jobs report is being keenly anticipated to show just how resilient the labour market is, in the face of deteriorating economic conditions.”

Challenges for internal control within organisations

Many external pressures are testing the purpose and effectiveness of internal control according to a report from the Association of Chartered Certified Accountants (ACCA), the Internal audit Foundation, and Institute of Management Accountants (IMA).

The report, Internal control and the transformation of entities, brings together results from some 2,000 of the three professional bodies’ global members to better understand the future of internal control. Internal control is a core part of business operational management; it achieves objectives, improves performance, and builds reputation. This is especially important as entities continue to transform, driven by data and technology.

Findings show that the continued effects of the pandemic, the unstable economic climate, regulation, and data and technology are presenting organisations with unique challenges for their internal control activities.

A challenge of lack of appropriately skilled staff was identified by 50% of respondents and 41% said technological advances are compromising existing internal controls. A lack of executive emphasis on internal controls was also identified by 32% of respondents as impacting management of internal control.

The purpose of internal control in an entity was also asked of respondents, with 88% saying it minimises risk, 84% that it prevents fraud, and 77% identifying that it protects assets.

Most respondents, 80%, agree or strongly agree that they need to apply their internal control framework to non-financial and ESG reporting.

ACCA chief executive Helen Brand said: “Internal control forms a core part of the activities of accountancy, finance and internal audit professionals, assisting them to ensure that entities operate effectively and efficiently. Yet the business model is changing for many because of various and interconnected external pressures. Given this ongoing turbulence, it’s therefore essential that organisations recruit and retain the skilled people who can ensure that internal controls are agile and future-ready to support business transformation and growth.”

IMA President and CEO Jeff Thomson added: “As we say in the foreword to our report, internal control goes beyond statutory compliance requirements. It helps entities build trust, confidence, and a positive reputation in achieving strategic business outcomes. All this is increasingly vital now and in the future as we do not see turbulence or volatility decreasing.’

International Audit Foundation Board of Trustees CEO and IIA President Anthony J. Pugliese adds: “Internal control demands appropriate prioritization by management and a combination of people, processes, technology, and data – all underpinned by an unwavering commitment to trust and ethics. The route to this is through professional qualifications and continuing professional development, which our three organisations commit to delivering now and in the future.”

The report also makes various recommendations and actions to improve internal control. This is sorted under various categories of main drivers of change such as strategic, transformation, people, processes, technology and data.

IAASB proposes narrow scope amendments to the IESBA code

The International Auditing and Assurance Board (IAASB) released proposed narrow scope amendments to International Standard on Auditing 700 (Revised), Forming an Opinion and Reporting on Financial Statements and ISA 260 (Revised), Communication with Those Charged with Governance.

Proposed amendments will help to put into practice recently approved changes to the International Ethics Standards Board for accountants’ (IESBA) International Code of Ethics for Professional accountants (including International Independence Standards). The changes to the IESBA Code require firms to publicly disclose when the independence requirements for public interest entities have been applied in an audit of financial statements.

The IAASB invites stakeholders to comment on the Exposure Draft via the IAASB website by 4 October, 2022. As part of the public consultation, the IESBA invites stakeholders to comment on aspects for its consideration of the need for any further action.

IAASB chair Tom Seidenstein said: “There are heightened expectations about auditor independence for audits of public interest entities. The recent changes to the IESBA Code, reinforced through the IAASB’s proposed changes to the ISAs, will enhance transparency to the public about application of independence requirements for audits of financial statements of public interest entities.”

This Exposure Draft is part of a broader IAASB project responding to recent revisions to the IESBA Code related to listed and public interest entities. These are undertaken as two tracks, this being Track 1. Other narrow-scope amendments that may be considered in Track 2 on a separate timeline with a later effective date include:

  • Aligning to the greatest extent possible definitions and key concepts; those that underlie the definitions in the International Standards on Quality Management (ISQMs) and International Standards on Auditing (ISAs) related to listed and public interest entities to IESBA’s definitions and key concepts in the revisions to the IESBA Code
  • Considering the applicability of existing differential requirements for listed entities in the ISQMs and ISAs – and whether these need to be amended considering IESBA’s revisions that address the definitions of ‘publicly traded entity’ and public interest entities.

Regulators crack down on Covid-related fraud

Company directors who have abused UK Covid-related support schemes have been banned and may face criminal prosecution.

The Insolvency Service has so far banned 179 UK company directors from running companies due to Covid-related fraud according to multinational law firm Pinsent Masons. This fraud relates to Government support schemes like furlough and Coronavirus Business Interruption Loan Scheme (CBILS).

By 31 March 2022, 140 directors were banned in the year. In April and May 2022, another 37 were banned. As more Covid-related fraud cases are discovered, the Insolvency Service is picking up the pace in investigating and banning directors, according to Pinsent Masons.

However, being banned is one of the lighter punishments company directors could face, Pinsent Masons adds. Directors convicted of fraud can face life-changing custodial sentences and face criminal prosecution if they don’t co-operate with authorities. Directors can also be held personally liable for debts of the company, especially where they have used business loans for personal spending.

Pinsent Masons partner Andrew Sackey said: “As the authorities sift through huge volumes of data, regulators are cracking down heavily on indicators of Covid-related fraud.”

“Directors who abused Covid support schemes need to carefully consider their options. Often, self-reporting is the best way to mitigate the risk of custodial outcomes.”

Covid-related fraud included some directors setting up new companies to claim Covid bounce back loans, companies inflating their revenue to increase the size of loans received and abuse of the furlough scheme. This includes employers pretending to furlough workers, making claims for non-existent employees and misrepresenting hours worked.

Fraudulent claims on the Government’s coronavirus support schemes are estimated by HMRC to have cost the taxpayer at least £5bn ($5.98bn).

Revised FRC Stewardship Code has positive impact

The revised UK Stewardship Code has had a positive impact on practices and reporting of asset managers and owners according to new research commissioned by the Financial Reporting Council (FRC).

The research found strong evidence of material changes to practice in the areas of governance, resourcing, stewardship activities, outcomes and reporting.

Evidence was taken from 55 asset managers and owners. It found that both groups are very positive about the impact of the Code.

All organisations had done some organisational restructuring, as per a new requirement of the code, to better integrate stewardship in their investment decision-making. Increases in the size of their stewardship teams and opportunities for more formal career progression in stewardship were reported by 96% of respondents. The Code’s influence was also reported by 77% of respondents to have made the quality of engagement better.

Asset owners reported that the most significant influence of the Code on their approach is that they now feel more empowered to monitor their investment managers.

The Code’s contribution to industry-wide change and focus on long-term goals for the investment community was also celebrated.

The FRC has been responsible for the UK Stewardship Code since December 2009 and was revised substantially in 2019. This included a wider definition of stewardship, applied to a range of asset classes and more focus on stewardship activities and the outcomes of these.

The FRC commissioned independent research, by a team of researchers from Minerva analytics, the Durham University Business School and the Dickson Poon School of Law, King’s College London. This was to better understand current practices and the impact the revised code has had.

FRC CEO Sir John Thompson said: “We commissioned this independent research so that we could assess the impact of the revised Code on stewardship practices, and it is very encouraging to see how the quality of practice and reporting have improved under its influence.

“We will learn from this research to maintain our standing as world-leaders in this area and continue to build on the Code’s effectiveness.”

Divorce exacerbates gender pensions gap

The gender pensions gap is estimated to be over twice the size of the gender pay gap. This widens in the event of divorce according to a briefing document published by the Government in April 2022.

The document suggests pension rights should be a compulsory part of divorce proceedings. Research from the UK’s largest family law firm Stowe Family Law supports this.

Stowe Family Law polled 400 women aged 35-64 around the UK to start to understand and help address the imbalance in the UK gender pensions gap.

Only 54% of the women polled have a private pension. Of those who don’t, 58% said it was due to them not earning enough to qualify. As the gender income gap widens, so does the pension gap.

At the start of women’s careers, the gender pension gap starts at 17% and reaches 56% at retirement. A women’s retirement wealth also only averages one-third of men’s. This is leading to many women facing retirement poverty.

In the event of divorce, this gender pensions gap widens. The survey found that 60% of women didn’t get a share of their ex-spouse’s pension as part of the financial settlement in their divorce, and 12% weren’t sure if they did.

The survey also suggested women were relatively unaware of their spouse’s private pension. Of the respondents who were married women, 25% did not know whether their spouse had a private pension and 77% didn’t know the value of it. However, of the women with a private pension, 70% didn’t know the value of it.

Many women have a lack of awareness around how financially significant an asset a pension is. This can play heavily against them in the event of divorce.

Stowe Family Law partner Matthew Taylor says: “Financially-speaking, failing to take into consideration the pension pot during divorce proceedings is an unwise move – especially for women.

We encourage women who are going through a divorce to think about the long-term financial ramifications of not seeking a share of their spouse’s pension. This is more important than ever, at a time when the cost of living is the highest it has been in 40 years.

We must debunk the assumption that pensions are too complicated to be worth understanding. Women who receive a share of their ex-spouse’s pensions will reap the much-needed benefits later in life when so many women would otherwise be faced with retirement poverty.”

Gender pay gap for FTSE 100 directors widens

The gender pay gap for FTSE 100 directors has increased with the average pay for female directors now £246,000 (USD$299,000), 74% less than the average for FTSE 100 male directors at £935,000, according to research by Mattison Public Relations.

This gender pay gap has widened from 73% to 74% since last year.  

In the last 12 months, average pay for male FTSE 100 directors grew by 7% (£59,000) compared to a 4% rise (£9,000) for their female counterparts.  

This pay gap is considerably higher than the overall UK average where women receive 15.4% less than men on average in the broader job market, according to the Office for National Statistics (2021).  

The large pay gap in FTSE 100 directors is because men are chosen for most higher-paid executive director roles.  Only 34 of the 238 FTSE 100 executive positions (14%) are currently filled by women. Women make up 393 of the 896 non-executive FTSE 100 roles (43%).  

In executive roles, the average FTSE 100 director is paid £2.7m, but non-executive roles average only £137,000 per year.

The majority of positions filled by women are the lower-paid non-executive roles. Women non-executives were paid on average £101,000 last year, while male non-executives were paid £166,000.  

Mattison Public Relations director Maria Hughes said: “Having female senior executives is a much more powerful way to communicate that a business is taking diversity seriously. Businesses must appoint women to their senior executive teams and enable women to progress through the ranks more quickly if they want to be perceived as taking this seriously as opposed to box-ticking.” 

The only woman to feature in the top 50 highest paid FTSE 100 directors was Emma Walmsley, CEO of GlaxoSmithKline.