Sárvár, 10 June 2010 Hilde Blomme FEE Director of Practice Regulation 10th Visegrad 4 Countries Meeting Auditing Update and Other Related Matters Sárvár, 10 June 2010 Hilde Blomme FEE Director of Practice Regulation

Agenda Current position within the European Commission ISA Implementation challenges Assurance services other than Audit eXtensible Business Reporting Language (XBRL) Ethics and Independence Thoughts on the implications for our profession

Recent messages from the European Commission re Auditing, Financial Reporting etc.

Recent Messages from the European Commission Want to reduce burden on SMEs Real difficulty is “how” Recognition that SMEs are fundamentally important to the economy so need to grow and develop the sector (97% of companies in Europe) Need to reflect on what changes, if any, are needed

Recent Messages from the European Commission Financial Reporting Micro entities Member State option Not about eliminating the accounting rules Parliament voted for revised proposals – would like to progress during Spanish Presidency Other SMEs Overhaul of 4th and 7th Directives IFRS for SMEs “Evolution” not “Revolution”

Recent Messages from the European Commission Financial Reporting (cont) Listed SMEs Should EC provide different rules? Should they have full IFRS or something else? What can be done in areas such as Prospectuses and other reports to shareholders?

Recent Messages from the European Commission Auditing Green paper – to be issued before end of September 2010 Structure of the market (concentration and choice) ISA adoption and auditor communication Role and governance of the auditors Audit for SMEs (do we need to simplify audit for SMEs and SMPs?) International co-operation Supervision and inspection of audit firms across Europe Ethical matters like conflicts of interest etc., etc.

Implementation of ISAs Challenges for the Firms/Profession and Applicability of ISAs to Audits of SMEs

Countries which have decided to implement Clarified ISAs (May 2010) Status # % Belgium (2012/2014), Bulgaria, Cyprus, Czech Republic, Finland, Hungary, Ireland, Latvia, Lithuania, Malta, Netherlands, Norway, Romania, Slovak Republic, Slovenia, Sweden, UK Yes 17 58 Austria, France, Luxembourg, Poland, Portugal, Switzerland No, awaiting EC 6 21 Denmark, Estonia, Germany, Greece, Italy, Spain Unclear Total 29 100

ISA Implementation Challenges for the Firms/Profession Need for considerable human and financial investment in first years: Translation of ISAs into local language New or updated audit approach policy manuals and methodology New or updated audit software New or updated training material and training efforts Coordination with and buy-in from stakeholders (preparers, regulators, inspection bodies, software providers, training consortia, professional media, etc.) Involvement of professional bodies (essential)

Bigger Audit Firms FoF has implemented clarified ISAs by IAASB effective date (2010 year-ends) Were already largely ISA compliant Can look after themselves for implementation Issues: Globally consistent approach Local pluses and potential minuses (local laws and regulations) Different approach for different industries and size of entities

Smaller Audit Firms Smaller firms need more help as it is a greater challenge for them Not all countries are starting from the same position re standards currently being used. Much to do in many countries Issues: Considerable time required to implement (start now) Need help from professional accountancy bodies (FEE Member Bodies) FEE Member Bodies seek help from IAASB, FEE, etc. IAASB to produce implementation or support material (video modules and slides for certain ISAs) – will it focus on SMEs

FEE ISA Implementation Task Force Set up to consider work required on implementation of clarified ISAs in 2010 and beyond Includes representatives of IFAC SMP Committee, EGIAN, World Bank, etc. Established current ISA implementation status and approaches across Europe (survey) Based on the results of the survey, still to determine what further work to be undertaken on implementation framework on communications Focusing on sharing information to help FEE Member Bodies and SMPs wherever possible Considering involvement with audit software providers

Applicability of ISAs for Audits of SMEs (1) Concerns of SMPs: Cost of audit will increase using clarified ISAs Concerns about scope to apply professional judgement to determine audit approach in line with nature, size, risk and complexity of audited entity Concerns about excessive audit documentation requirements Expectations of public oversight bodies (POBs) upon quality assurance reviews or inspections are unclear

Applicability of ISAs for Audits of SMEs (2) Response: Need to re-engineer the audit to benefit from work on internal control environment Open debate of FEE with IAASB, POBs, EGAOB and European Commission on concerns and possible resolution FEE Policy Statement on ISAs produced IAASB Staff Q&A on proportionality of ISAs in SME context issued IAASB implementation modules rolled out Update of APB Practice Note 26 on Guidance on Smaller Entity Audit Documentation completed IFAC SMP Committee Guide on Using ISAs in the audit of SMEs being reviewed – due end of 2010

Assurance Services Other than Audit

Impact of Use of Audit Exemption Thresholds

Use of Audit Exemptions for Limited Liability Companies in the EU, Norway and Switzerland Countries % Maximum or near maximum thresholds: Balance sheet total: €4.400.000 Net turnover: €8.800.000 (Austria, Belgium, Germany, Ireland, Italy, Luxembourg, the Netherlands, Romania, Slovenia, Switzerland1, United Kingdom) 11 38 Balance sheet total: between € 2.500.000 and 3.000.000 Net turnover: between € 5.000.000 and 5.700.000 (Greece, Poland and Spain) 3 10 Balance sheet total: between € 1.000.000 and 1.800.000 Net turnover: between € 2.000.000 and 3.100.000 (Czech Republic, France (except SA), Lithuania and Portugal) 3 (1) 1 Introduction or increase in 2007, 2008 or 2009

Use of Audit Exemptions for Limited Liability Companies in the EU, Norway and Switzerland Countries % Balance sheet total: between € 500.000 and 900.000 Net turnover: between € 1.000.000 and 1.800.000 (Estonia1,4 and Slovak Republic1) 2 8 Balance sheet total: between € 100.000 and 500.000 Net turnover: between 200.000 and 1.000.000 (Bulgaria, Denmark1,4, Finland2, Hungary1 and Latvia1) 5 17 Balance sheet total/ net turnover: €0 (Cyprus3, France (SA), Norway, Malta3, Sweden4) 29 100 1 Introduction or increase in 2007, 2008 or 2009 2 Decrease in 2007 3 For tax purpose 4 Increase in 2010 (final or expected)

Impact of use of Audit Exemption Thresholds Trend to increase audit exemption thresholds in EU 97% of all EU audits are SME audits The market for statutory audit is shrinking (95% are below EU audit threshold) Substitution by voluntary audits is not evident However, the economy continues to need comfort that the financial performance of companies is fairly presented

Reaction to more companies not requiring an audit

Assurance services other than audit Issues: “An audit is an audit” must be preserved (brand protection) Increase in audit exemption thresholds More regulatory pressure Clarified ISA audit more demanding and more costly Desire by profession to provide something to fill the hole ……… Responses: Development of / changes to assurance services other than audit Addressed on national, FEE & IAASB level Divergent views in different countries Desire to arrive at positive audit opinion with less work – not possible without confusion or brand damage FEE survey July 2009

Assurance initiatives other than audit in some countries Consideration of or proposals for non audit assurance service for (certain) smaller entities in Denmark, Finland and Malta Mandatory statutory review for ‘‘SMEs’’ in Estonia and Switzerland Presentation or compilation engagements with certain assurance in France and Germany Accountant (not auditor) report for small charities & pension schemes in Ireland Continuous integrated reasonable assurance by Collegio Sindacale in Italy Limited assurance based on review plus substantive procedures in UK (ICAEW)

Assurance services other than audit: conclusions Fragmentation a major issue in Europe and beyond if no global standard Call by FEE for Member States and National Institutes to exercise constraint IAASB encouraged to speed up work on review engagements- exposure draft late 2010

eXtensible Business Reporting Language (XBRL)

eXtensible Business Reporting Language (XBRL) Allowing or mandating filing of audited FS and / or tax filings under XBRL becomes more and more common IAASB project proposal to develop Pronouncement on expected auditor work efforts and implications on his reporting if XBRL data filing with FS or if only XBRL data filed FEE XBRL Task Force has prepared a FEE Policy Statement to educate the accountancy profession and third parties on the use of XBRL Explosion in available literature shows increased activity around world Profession needs to engage now – increased demand for SMP services

Ethics & Independence

Ethics & Independence Principles: covered in Articles 21 & 22 of SAD EC recommendation on independence (2002) still applicable Revised IESBA Code of Ethics (July 2009), effective 1 January 2011, significantly strengthens the independence requirements for PIE audits, non-PIE audits and other assurance services Changes re key audit partner, partner rotation, internal audit services, tax services, relative size of fees, contingent fees EU MS currently have wide variety of independence principles and/or requirements based on (old) IFAC code – need for EC Recommendation

Thoughts on the implications of changes for the Auditing Profession Messages from FEE SME/SMP Conference Questions that need to be answered if we are to prosper in the future

Some messages from the FEE SMP/SME Conference in Venice There will be more regulation but there is a desire to get it right first time Profession is changing and our services to SMEs will change Clients want to pay for expertise and experience Audit is a diminishing market but other services will stand in its place

Messages from clients (raised at the Venice conference) Improve your knowledge of the business More focus on the business and less on figures SMEs want support from SMPs to help them develop their businesses Wide range of services to be provided not just audit (but will regulators allow it?) Prepared to pay more for added value services but not necessarily for audit

Implications for the Profession Will there be convergence of Standards globally – Auditing, Ethical, Financial Reporting? If not, what will be the implications? How will the Regulators finally react to the Financial Crisis? More regulation or better regulation? What will the emerging markets of China, India, Russia and Brazil adopt as their Standards and how will this impact on us? Some already moving to IFRS and ISAs What will be the impact of XBRL be on financial reporting and auditing? Are we well placed to lead on Sustainability?

Implications for the Profession In Europe : Will the profession across parts of Europe lose credibility if ISAs are not adopted by the EC Will we have a two track profession – auditors and non-auditors and/or large firms and small firms working with different auditing standards ? How will we train our people (and, as a consequence, those who go into industry and commerce)? How can we attract and retain the best people? If, globally, we don’t have an audit for the vast majority of companies what will the market want in its place (if anything) and are we equipped to provide it?

There is a big opportunity (if we seize it) as well as a big challenge

Discussion and Questions

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