Audit Committee Chairs show keen interest and understanding of ESG activities

The Financial Reporting Council (FRC) has published a research report about Audit Committee Chairs’ (ACCs) views on, and approach to Environmental, Social and Corporate Governance (ESG) activities and reporting

The report, commissioned by the FRC and conducted by independent research agency YouGov, involved qualitative interviews with 40 ACCs of Public Interest Entities (PIEs), representing a diverse range of organisations, including FTSE 100 and FTSE 250 companies, other listed equities, building societies, and unlisted banks. 

Aimed at gaining a deeper understanding of ACCs’ views and approaches towards ESG reporting and assurance, the report highlights the work that ACCs are already doing in this space, recognising the importance of ESG as an integral part of good business practice and effective stakeholder communication. The respondents noted its increased significance in recent years, triggered by the Covid-19 pandemic and heightened awareness of environmental and social issues

ACCs showed a strong interest and understanding of ESG activities within their organisations. However, their involvement in decision-making processes, particularly related to environmental and social elements, is often limited and their primary role lies in risk management, compliance, and ensuring effective reporting. 

Some interviewees also expressed concerns about the broad and evolving nature of ESG, making consistent measurement and reporting challenging across sectors and markets. They called for practical, sector-specific guidance to measure environmental and social activities and welcome best practice examples to ensure meaningful ESG reporting without excessive reporting requirements. 

Commenting on this, FRC executive director, Mark Babington, said: “We are pleased to see that Audit Committee Chairs are already focusing on, and recognise the importance of, ESG reporting and assurance for their organisations and stakeholders – and this report provides valuable insights into the current practices and challenges faced by ACCs in this rapidly evolving area. 

“We are committed to supporting ACCs with practical guidance and best practice examples to ensure high-quality and consistent ESG reporting.” 

PCAOB Staff Report: Auditors must respond to Unique Risks of Crypto Assets 

The use of crypto assets presents unique audit risks to public companies and broker-dealers and requires an appropriate risk assessment and audit response by audit firms, according to a staff report from the US’ Public Company Accounting Oversight Board (PCAOB). 

Since 2017, PCAOB inspectors have been reviewing audits of public companies where transactions or holdings associated with crypto assets were material to the financial statements. In its 2023 inspections, the PCAOB is continuing to prioritise risks related to material digital assets. 

As detailed in the report, Inspection Observations Related to Public Company Audits Involving Crypto Assets, PCAOB inspections have identified common audit deficiencies related to crypto assets in the auditor’s procedures for the following areas: 

  • Fraud and significant unusual transactions 

  • Ownership of crypto assets 

  • Relevance and reliability of information used as audit evidence 

  • Revenue recognition in crypto asset transfer 

  • Arrangements with mining pool operators 

In addition to inspection observations, the staff report discusses good practices that some audit firms have implemented and that may enhance audit quality. These good practices include the following: 

  • Consultations – Engagement teams at some firms are encouraged to consult with the members of the firm’s professional practice group and/or subject-matter specialists related to crypto assets. 

  • Subject-matter specialists – Certain firms have established centralised groups related to distributed ledger technology (e.g., cryptography, blockchain technology). 

  • Technology-based tools – To support public company audits involving crypto assets, some firms have developed proprietary, technology-based tools. 

PCAOB issues proposal to increase auditor vigilance against fraud

The Public Company Accounting Oversight Board (PCAOB) has issued for public comment a proposal that would amend PCAOB auditing standards related to the auditor’s responsibility for considering a company’s noncompliance with laws and regulations, including fraud.  

If adopted, the proposal would strengthen auditor requirements to identify, evaluate, and communicate possible or actual noncompliance with laws and regulations. The deadline for public comment on the proposal is 7 August 2023.  

Commenting on this, PCAOB chair, Erica Williams, said: “By catching and communicating noncompliance sooner, auditors can help companies course correct and better protect investors from risk.”  

Broadly, the proposal seeks to strengthen and enhance auditor obligations related to a company’s noncompliance with laws and regulations in three key respects: 

  • Identify – The proposal would establish specific requirements for auditors to proactively identify – through inquiry and other procedures – laws and regulations that are applicable to the company and that could have a material effect on the financial statements, if not complied with. The proposal also makes explicit that financial statement fraud is a type of noncompliance with laws and regulations.  

  • Evaluate – The proposal would strengthen requirements related to the auditor’s evaluation of whether noncompliance with laws and regulations has occurred, and if so, the possible effects on the financial statements and other aspects of the audit. For example, the proposed standard would require the auditor to consider whether specialised skill or knowledge is needed to assist the auditor in evaluating information indicating noncompliance has or may have occurred.  

  • Communicate – The proposal would make it clear that the auditor is required to communicate to the appropriate level of management and the audit committee as soon as they are made aware that noncompliance with laws or regulations has or may have occurred. Additionally, the proposal would create a new requirement that the auditor must communicate to management and the audit committee the results of the auditor’s evaluation of such information. Specifically, this communication would address which matters are likely noncompliance and the effect on the financial statements for those matters that are likely noncompliance. 

By requiring auditors to identify and communicate noncompliance sooner, the proposed amendments, if adopted, would encourage companies to take more timely remedial actions and thereby reduce investor harm caused by legal and regulatory penalties. Another potential benefit would be to lower the likelihood that financial statements are materially misstated due to noncompliance with laws and regulations.  

Throughout the proposal, the Board requests comment on specific issues. Readers are encouraged to answer these questions, to comment on any aspect of the proposal, and to provide reasoning and relevant data supporting their views.  

KPMG UK and MindBridge alliance powers audits with AI technology

KPMG UK and MindBridge have announced a strategic alliance to help bring advanced artificial intelligence (AI) into the firm’s digital audits. 

KPMG’s smart audit platform, KPMG Clara, will now use MindBridge’s technology to help unleash the power of AI into audits, further enabling the identification of unexpected or high-risk transactions and helping to provide enhanced audit quality. 

The new technology has been piloted with a number of KPMG member firms, including the UK, and is presently being rolled out throughout the global network following the announcement of a global alliance with Mindbridge. Through KPMG Clara, KPMG firms continue with their shared commitment to transform audits by harnessing the power of technology with the aim of providing higher quality and transparent results

Released in 2017, as a scalable, cloud-based platform, it offers a risk-based and data-enabled digital audit that is consistent across KPMG firms around the world. MindBridge’s advanced statistical, machine learning, and rules-based analytics technology, combined with KPMG Clara’s capabilities, can help improve risk identification in digital audits.   

With growing public interest in the use of AI technologies, the alliance aims to act as a world-leading example of how to design, build and apply the powerful capability of AI in a safe and responsible manner. Both organisations came to the table with a shared goal of reimagining the audit experience and have leveraged AI to increase audit quality and transparency while carefully managing associated risks and putting necessary safeguards in place. The new strategic alliance will embed AI in audits consistently across the KPMG global network.  

Key Questions for Audit Committees Overseeing Sustainability-Related Disclosure

To implement the International Sustainability Standards Board’s (ISSB’s) standards and jurisdictional standards and regulatory requirements, organisations must ensure effective oversight arrangements to deliver high quality, cost effective and decision useful reporting, says the International Federation of Accountants (IFAC). 

Because many professional accountants serve on and are accountable to audit committees, the International Federation of Accountants (IFAC), has released Key Questions for Audit Committees Overseeing Sustainability-Related Disclosure to prepare audit committees with effective questions to ask when overseeing sustainability and ESG related disclosures. 

The key questions for audit committees cover: 

  • Roles and responsibilities across the organisation 

  • Data collection, processes and controls 

  • What’s being reported? 

  • Audit and assurance 

IFAC CEO Kevin Dancey said: “Professional accountants serving on boards and audit committees play critical roles in the oversight of sustainability-related disclosures, and this release will help prepare audit committees to step up their roles to advance sustainability. We also encourage professional accountancy organisations (PAOs) to utilise these key questions to help their members stay up to date with, and prepare for, expanding oversight responsibilities in relation to sustainability.” 

AAT calls for more investment in HMRC customer support 

AAT (Association of Accounting Technicians) has expressed concern after HMRC announced in early June that it will pilot a new seasonal model for its self-assessment helpline to free up more advisers to focus on urgent queries elsewhere. The leading accountancy professional body has called on the government to instead focus on boosting investment in HMRC’s customer services. 

The pilot will begin on 12 June and will involve HMRC redirecting self-assessment queries from the helpline to digital services, including online guidance, digital assistant and webchat, before the helpline reopens on 4 September. The pilot aims to free up 350 advisers (full-time equivalent) to deal with urgent queries on other lines and customer correspondence. 

This resource constraint on HMRC’s customer services was a major reason behind a letter which AAT and nine other professional accountancy bodies wrote to the Chancellor, ahead of the Spring Budget in March 2023, urging the government to prioritise investment in HMRC’s service levels. 

Responding to the announcement, Adam Harper, Director of Professional Standards and Policy, AAT, said: 

“This pilot raises significant concerns about the impact it will have on taxpayers, particularly those who are digitally excluded or who cannot currently access the service they require via digital platforms. The need for such a pilot, in order to redirect staff elsewhere, highlights the much bigger challenge that HMRC faces in balancing competing priorities with a constrained budget. Ultimately, the government must address the root problem that more investment is needed.  

“AAT and other professional accountancy bodies remain concerned that HMRC does not currently have sufficient resources to improve its customer service levels. Although AAT is supportive of the digital agenda, we believe it can only be delivered successfully if HMRC is properly resourced for customer service, providing a strong foundation for effective tax administration. Today’s announcement therefore shows the increasingly pressing need for further investment to support HMRC and reverse declining service levels.”