Essential Corporate News: Week ending June 24, 2022

FRC: Consultation on firm-level Audit Quality Indicators

On June 22, 2022 the Financial Reporting Council (FRC) published a consultation document seeking views on publicly available audit quality indicators (AQIs) to drive audit quality improvements. This follows a Thematic Review of AQIs published by the FRC in May 2020.

AQIs are described as quantitative and qualitative measures of external audit quality, including input, output, and outcome measures. They indicate an audit firm’s historical, present or future ability to perform quality audits, as well as providing insights into audit quality when read with other AQIs and relevant context. The consultation document sets out the FRC’s preferred 11 AQIs, to be reported by audit firms in scope, with four others listed as possible alternatives/additions.

The FRC considers that public reporting of firm-level AQIs (i.e. those at the level of the audit practice as a whole), which are measured on a consistent and comparable basis, will broaden the range of information regarding audit quality available to audit committees and other users of audit services beyond the FRC’s Audit Quality Review (AQR) scores, something which has been a frequent request from stakeholders. Being able to make comparisons between firms on AQIs beyond external inspection results, including between the largest firms and the challenger firms, and then discuss these factors with the firms themselves, should also help audit committees make a more informed choice when selecting an auditor. 

Views are sought on a number of questions in the consultation document, including the following:

• Scope of firms/audits – the FRC proposes that firms should start reporting AQIs when they enter the scope of the Audit Firm Governance Code (AFGC), which will apply to all firms that audit more than 20 public interest entities (PIEs) or at least one FTSE 350 company.

•  Audits to be included – The FRC proposes a segmented approach, whereby AQIs are presented for PIE and non-PIE audits separately.

• Reporting date and period – The FRC proposes that the reporting of AQIs should cover the period April 1 to March 31 for each year but only firms currently publishing AQIs in their Transparency Reports should be expected to report for the period April 1, 2023 to March 31, 2024.

• Supporting narrative – View are sought on whether it would be helpful if quantitative AQIs are supported by specific contextual information.

• AQIs to be reported on – The FRC proposes to ask firms to report AQIs at firm level, possibly segmented into PIE and non-PIE data (as above) and seeks views on those it has set out. These cover the areas of performance monitoring and remediation, quality monitoring, resource planning and people management, information and communication, and governance and management. 

The deadline for responses to the consultation is August 18, 2022. The FRC is aiming to produce a feedback statement by the end of 2022. This will include a discussion of the costs of these proposals.  Subject to consultation responses, the FRC proposes that from April 1, 2023 firms start collecting data for the selected AQIs (if not already doing so), with a view to reporting them to the FRC by the end of May 2024, for publication shortly thereafter.

(FRC, Consultation on firm-level Audit Quality Indicators, 22.01.2022)

FRC: Professional Judgement Guidance for Auditors

On June 23, 2022 the Financial Reporting Council (FRC) published new guidance for auditors to improve how they exercise professional judgement. The guidance includes a framework for making professional judgements and a series of illustrative examples showing how professional judgement might be used in practice. The FRC states that if it is applied widely, the guidance will improve audit quality by enhancing the consistency and quality of professional judgement exercised by auditors.

While aimed primarily at auditors, the guidance document notes that the framework could also be useful for audit committees, and those charged with governance of audited entities more broadly, in enhancing their understanding of an auditor’s judgement process.

The guidance is non-authoritative and is intended to be persuasive rather than prescriptive, encapsulating good practice. However, practitioners who chose not to use or consider the guidance will need to be prepared to explain how they have complied with the relevant engagement standards.

The professional judgement framework, as set out in the guidance, consists of four main components:

• Mindset – An appropriate mindset for auditors exercising professional judgement;

• Professional Judgement Trigger and Process – A suggested professional judgement process, together with a reminder to remain alert to situations which may require professional judgement;
• Consultation – Effective communication with a range of relevant parties; and
• Environmental Factors – Factors that may be present in the environment of those making a judgement, that can impact on how challenging it is to exercise professional judgement in an appropriate manner.

Three illustrative examples are provided in the guidance.

(FRC, Professional Judgement Guidance for Auditors, 23.06.2022)

Companies House: The Register of Overseas Entities (Delivery, Protection and Trust Services) Regulations 2022 - Draft

On June 23, 2022 Companies House reported in a blog post that draft regulations, The Register of Overseas Entities (Delivery, Protection and Trust Services) Regulations 2022, have been laid before Parliament in connection with the Economic Crime (Transparency and Enforcement) Act 2022 (ECTE Act). The ECTE Act provides for a new Register of Overseas Entities to be created and held by Companies House and, in connection with that, the draft regulations  relate to the electronic delivery of documents, the protection of information and registrable beneficial owners.

Electronic delivery of documents

Part 2 of the draft regulations makes provision under section 1069 Companies Act 2006 for certain specified documents which must be delivered to the registrar for the purposes of the Register of Overseas Entities to be delivered by electronic means. Regulation 4 provides an exception.

Protection of information

Part 3 of the draft regulations makes provision under section 25  ECTE Act requiring the registrar to make information relating to a relevant individual (an individual who is or used to be a registrable beneficial owner or managing officer of an overseas entity) unavailable for public inspection and to refrain from disclosing that information except in specified circumstances.

Regulations 5 and 6 set out when protected information must be made unavailable for public inspection and not disclosed by the registrar. Regulation 7 makes provision for the grounds on which an application to protect information can be made, the application process including details as to what the application must contain and determination of the application by the registrar. Regulation 8 makes further provision about the application and its determination, including the ability of the registrar to refer any question relating to the assessment of the nature or extent of any relevant risk to any other person who the registrar considers may be able to assist. Regulation 9 sets out how an application can be withdrawn before it is determined.

Regulation 10 makes provision for appeals to the High Court or Court of Session when an application to protect information is unsuccessful. Regulation 10 provides that no appeal can be made without the permission of the court.

Regulation 11 makes provision as to the steps the registrar must take following a determination that the application has been unsuccessful. Regulations 12 and 13 make provision for the duration of a determination that the information must be protected including provision for revocation by the registrar.

Overseas trust service providers and registrable beneficial owner requirements

Part 4 of the draft regulations specifies that a legal entity governed by the law of a country or territory outside the UK, where the provision of trust services is regulated in that country or territory by a supervisory authority, and which provides trust services (acts as a trustee of a trust, or a similar legal arrangement), will be considered to be “subject to its own disclosure requirements” for the purposes of Part 1 Schedule 2 of the ECTE Act which sets out the meaning of “registrable beneficial owner” for the purposes of that Act.

The draft regulations will come into force on the day section 3 of the ECTE Act (Register of Overseas Entities) comes into force.

(The Register of Overseas Entities (Delivery, Protection and Trust Services) Regulations 2022 – Draft, 23.06.2022)

(Companies House, Explaining the secondary legislation for the Register of Overseas Entities - part 1, 23.06.2022)