In the January issue of Accountancy, we gave a brief snapshot of the potential implications of the new statutory requirement for predecessor auditors to provide their successors with access to their working papers. Since then, things have rapidly moved on.
The ICAEW's Audit and Assurance Faculty, with the Professional Standards Directorate, has been involved over the last three months in detailed discussions with the Professional Oversight Board (POB), the Department for Business, Environment and Regulatory Reform (BERR) and legal counsel in relation to the statutory requirement and what this means for auditors within the UK.
Clarification has been sought from BERR on a number of aspects of the statutory requirement brought about by the European Commission legislation and the Companies Act 2006 ('the 2006 Act'), including the implementation date and the entities to which the legislation applies.
The requirement for a predecessor to allow a successor access to relevant information applies in respect of appointments for the auditors of financial years starting on or after 6 April 2008. It applies to all statutory audits as defined by and listed in s1210 of the Companies Act 2006. We also have confirmation that this requirement will not apply to unincorporated charities and pension schemes.
BERR has confirmed that there is no intention to create a new liability on the predecessors to either the client or the successors in relation to providing access to audit working papers. It has stated that 'the statutory requirements … do not alter the existing liability of each auditor in relation to its respective audit'.Regulation developments
Over recent months and after further face-to-face discussions with the POB, the audit regulation and related guidance has been redrafted in consultation with leading counsel to ensure that it meets its purpose, which is 'to assist in maintaining the effectiveness (and cost effectiveness) and the efficiency of the audit process in the context of a change of auditor, with the intention being to reduce the (actual or perceived) risk of changing auditor'.
The audit regulation 3.09, along with the full suite of audit regulations, has now been published and is available on the ICAEW's website.
In support of the audit regulation and its related guidance, the faculty has issued an exposure draft of a technical release to provide a helpful and effective framework to assist auditors in managing the process in relation to access. It is intended to underpin the mandatory regime that has been put in place through the 2006 Act and the audit regulation and guidance.
There are separate statutory provisions for auditors for the making of representations and hearings at meetings and for including a statement of circumstance where the predecessor auditor has either been removed as auditor, or has not been reappointed, or, indeed, where the predecessor has resigned. Neither the audit regulation 3.09 and its related guidance nor the faculty technical release provide for or seek to duplicate that framework that already exists under the 2006 Act. However, the POB has just issued guidance in this area.Transition
The statutory requirement does not apply to appointments for any accounting periods starting before 6 April 2008. There may be a short transitional period when auditors change and relevant accounting periods are close to but prior to that date. It is important to note that the audit regulation and related guidance and the technical release do not apply to any prior periods.
If firms receive a request for information in respect of appointments for accounting periods to which the statutory requirement does not apply, they need to consider their options carefully. They have a choice. They can either choose not to provide the information, which is perfectly acceptable, or they could choose to provide it on a voluntary basis.
If firms are willing to provide information outside of the mandatory framework, the guidance within the technical release will not be suitable. But there are additional considerations that they will need to take account of, including the need for client permission to disclose confidential information.
An exchange of letters is, therefore, likely to be needed between both firms when information is to be made available on a voluntary basis. Predecessor firms will need to obtain the client's consent, ideally in a letter, before releasing any information. The terms of all these letters will need to be considered carefully and firms may wish to consider taking advice on the format of such letters before providing any information on a voluntary basis, outside of the statutory framework.Cost
The legislation imposes a mandatory requirement but is silent on the question of costs. Our view is that a significant level of charging could be seen as a barrier to competition and choice and could also be an unnecessary burden on the process of charging auditors, which is not the intention of the legislation. But some recovery of actual costs may be reasonable. The technical release elaborates further on these. It would not, however, be reasonable to include any profit element in any costs that were charged. Charges that go beyond 'actual costs' could affect the assumption of responsibilities.Practicalities
The faculty's technical release outlines some risk management procedures that both predecessor and successor auditors need to consider, including:
• an exchange of letters setting out the basis on which the information is being requested and provided;
• the approach to information or explanations; and
• focusing on information that is relevant.
The requirement only applies between auditors of UK entities subject to the 2006 Act, and is only effective after the successor has been appointed. It is separate from and additional to the ICAEW's Code of Ethics, which sets out procedures to be followed before accepting an appointment. All requests need to be made in writing, but information can be provided in any form at a location of the predecessor's choosing. Requests for access should be reasonable, without causing the predecessor or successor undue resourcing or timing difficulties.
The predecessor can provide explanations orally or in writing and questions should only be directed to seek clarification or explanations about the papers that have been accessed. The predecessor needs to keep in mind that its obligations when providing such clarification or explanations do not extend beyond relevant information. The explanations should be factual and a written note or record of the request or explanation given would be desirable.
Requests for papers that do not relate to the firm's audit work (eg, tax papers) do not fall under this requirement.Confidentiality
As the predecessor is complying with a mandatory requirement, then providing this access will not breach confidentiality. However, there are some obvious duties around confidentiality that must be maintained, eg, disclosure of information that is subject to legal professional privilege will require careful consideration of the legal position of the particular circumstance. Also, there are tipping-off offences that can be committed if there is disclosure of knowledge or suspicion that a report has been made to any bodies authorised to receive such disclosures.
Sumita Shah is manager in the ICAEW's Audit and Assurance Faculty and leads the development of the faculty's policy in relation to duty of care and risk management issues.