Essential Corporate News – week ending February 4, 2022

Ministry of Justice: Electronic execution of documents – Industry Working Group Interim Report

On February 1, 2022 the Ministry of Justice published an interim report from the expert Industry Working Group on Electronic Execution of Documents which was established in 2021 following a Law Commission recommendation in 2019. The interim report sets out the Working Group’s analysis of the current situation concerning electronic execution of documents in England and Wales, sets out best practice guidance based on existing technology, and makes recommendations for future analysis and reform. 

In relation to the current situation in the United Kingdom, the Working Group proposes that the existing legal framework provided by the eIDAS Regulation should be used. The different kinds of eSignatures are described and the reasons for the limited uptake of more sophisticated eSignatures are examined. The formal requirements relevant to different contexts and what is possible with current technology are also addressed in detail. 

The chapter in the interim report which focuses on best practice addresses, among other things, how to decide whether an eSignature is appropriate and, if so, which kind is best suited to the particular situation. The steps to follow are then explained. The best practice guidelines set out relate to five key principles as follows:

• Agree as early as possible that a document is to be executed electronically and the procedure for doing so. Determine the optimal form of electronic signature for the transaction, and in particular which eIDAS category (Qualified, Advanced and Simple) is required. This should be a matter of user-choice (depending on nature of parties/risk level/value/personal circumstances) and larger users should establish policies in relation to this. 
• Use a signing platform that provides a minimum set of security/safety/functionality with a strong audit trail that demonstrates an intention to sign by the signatories. Such platforms should as a minimum include the ability of signing parties to download/retain executed documents. In particular storage, so-called ‘shelf life’ of documents and their audit trail details should be clearly identified by the signing platform to enable informed choice by signatories. 
• Consider whether additional evidence to record the fact that the signatory is approving the document is necessary and/or appropriate. 
• Where possible, provide multiple options to vulnerable customers or counterparties so that these groups can adopt a method of signing that suits their needs.
• Authentication should be easier for those with secure digital identities, but this should not be essential.

The Working Group’s recommendations for further analysis, development and reform are divided into legal aspects, technical issues and other kinds. The question of accreditation and kitemarking, an issue on which the Working Group did not reach agreement, is also explained. 

A key conclusion of the interim report is that both legal reforms and technological advances will be far more effective if they are developed in step with one another. It is a method that will continue to shape and inform the second phase of work which will focus on how electronic signatures function in the context of cross-border transactions, and how best to use electronic signatures so as to optimise their benefits when set against the risk of fraud.

The interim report notes that the benefits of electronic execution of documents include speed, clarity, simplicity and security. Appropriate electronic signatures are a safe and effective way of entering into legally binding transactions of all kinds and the technology and legal framework already exist to allow electronic signing by anyone so the foundations necessary for a cultural shift in document execution are already present. The Working Group believes that electronic signatures can and should be used now on a wide scale, and that members of society should have confidence in doing so. However, to achieve this widespread adoption requires an increase in the awareness of what can already be done, how it can be done, and the advantages of doing so. 

(Ministry of Justice, Electronic execution of documents – Industry Working Group Interim Report, 01.02.2022)

FRC: Audit Committee Chairs’ views on, and approach to, audit quality

On January 26, 2022 the Financial Reporting Council (FRC) published the results of independent research it commissioned (which builds on similar research in 2020) and which the FRC states  reinforces the case for developing standards for Audit Committees to help promote a more consistent approach to audit quality. The research, conducted by YouGov, was based on in-depth interviews with Audit Committee Chairs (ACCs) discussing how they carry out their role. ACCs interviewed included some from FTSE 100, FTSE 250, and smaller listed entities.

Key points arising from the research include the following: 

• Defining a good quality audit - ACCs were asked to define a good quality audit and identified proper planning (alongside knowledge of the business and the specific sector), communication, and timeliness from the audit team as being important. The lead audit partner also has a significant impact on perceptions of audit quality but the research notes that it was not always clear that ACCs distinguished between a good quality of audit and a good quality of service from the auditor. 
• Selecting an auditor  - Consistent with the 2020 research, ACCs start planning the audit tender 12–18 months before it takes place. The number of firms invited to tender often depends on the size of the business, as well as whether potential auditors have any conflicts of interest. Many ACCs commented on issues regarding limited choice of auditors due to the complexity or size of their business; however, there is a negative perception of joint audits solving this problem. Key factors when selecting an auditor included the expertise, consistency, and professionalism of the audit team. Alongside these factors, ACCs commented that auditors should also have a broad understanding of the business, along with good chemistry and communication across their team. 
• Planning and executing an audit -  ACCs tend to assess quality before, during, and after the audit. This assessment is made up of both formal and informal interactions alongside documentation and reporting. Surveys of the firm’s senior leadership, Audit Committee, and the accounts function are occasionally used by ACCs to gauge audit quality alongside audit reports. ACCs commented on the importance of an auditor’s ability to build a rapport and to be able to offer challenge and show a healthy level of scepticism without being confrontational. It is key that a continuous and transparent communication style is adopted to enable firms and auditors to take both a proactive and reactive approach to issues. 
• Changes in the audit sector - Although ACCs were concerned about the potential impact of the pandemic, most were pleasantly surprised by the response from auditors. Working from home has brought forward technological advancements and ACCs have seen new processes being set up promptly. However, informal interactions were missed, as face-to-face ad hoc conversations often allow for a more transparent and proactive communication style. 

(FRC, Audit Committee Chairs’ views on, and approach to, audit quality, 26.01.2022)