Do you want to access the full text of articles?

Please see our digital edition archive for the full text of articles.

Alternatively:

If you are a Chartered Accountants Ireland member, please visit the RIS service where Accountancy Ireland is available free of charge via the EBSCO databases.

If you are an Accountancy Ireland subscriber (i.e. you pay each year to receive your copy of Accountancy Ireland) please contact our Subscriptions Department quoting your subscription number and include details of the article you want.

All other users should enquire from their local public or college library about accessing full text Accountancy Ireland articles.

Home / ...

issued a letter to all auditors of Irish Credit Unions on the 27th July 2004 entitled Guidance Note for the Auditors of Credit Unions. This letter is of great significance as it details the expectations of the Regulator in relation to independent auditors and also sets out a new requirement for the rotation of audit partners involved in all credit union audits.

Background It is important to reflect on the context in which this letter has issued. Firstly, the credit union sector in Ireland is of great economic and social importance, far greater in relative terms, for instance, than in the UK. Irish credit unions are a significant force in the deposit taking segment of the financial services sector in Ireland. Credit unions are quite distinct from other financial institutions in a number of ways, principally derived from their community based, voluntary culture and ethos. There is a wide spectrum of sophistication and complexity in the sector. This ranges from, at the smaller end, what are in effect tightly knit savings clubs, to quite substantial quasi banks which compete on the high street with increasing ranges of financial services and products. In common with other segments of the financial services sector, credit unions have been in the news with a range of problematic issues in recent years. These have tended to be centred on systems and governance issues, and have undoubtedly contributed to the greater sensitivity and focus in relation to the area. The new financial service regulator, IFSRA, has a lot on its plate at the moment. It is dealing with significant issues right across the financial services spectrum, and is clearly anxious to ensure that credit unions are seen to be stable and well regulated. The guidance note for auditors can be seen in the context of a focus on the wider area of corporate governance in the credit union sector and I understand that the Regulator will separately be issuing guidance to directors and supervisory committees of credit unions on their own governance responsibilities.

The Guidance for Auditors The IFSRA letter is interesting in that it underlines very clearly the significance which the Regulator attaches to the role of external auditor. It specifically states that “IFSRA relies on the external audited reports and the financial statements of credit unions”. The letter goes on to recite the provisions of the Credit Union Act 1997 and the Investment Intermediary Act 1995 in respect of the role of auditors and their reporting responsibilities through IFSRA. Particular emphasis is given to auditor independence and the need for absence of conflicts of interest. Concern is also expressed that auditors should be mindful of the particular expertise and resources necessary for credit union audits. I think one can infer from this that IFSRA has some level of concern that such matters may not be receiving sufficient attention at present from credit union auditors. IFSRA clearly regards credit unions as public interest entities and wants auditors to approach their work with this in mind. Auditors should already have been treating credit unions as public interest clients, but IFSRA wants to see more evidence of this in the delivery of the audit. This has major implications for auditors in considering whether to accept appointment to a credit union, and subsequently in planning and assessing the risk associated with such audits. IFSRA emphasises that the auditor has an obligation before signing his report on financial statements to meet and report to the directors and the members of the supervisory committee. Again the emphasis is on the requirement for a physical meeting is of significance and may reflect the view that this has not been invariable practice to date. Review Group on Auditing IFSRA fully endorses recommendations made in the Report of the Review Group on Auditing, and states that implementation of these recommendations is now required. In particular, three of the recommendations are highlighted:

l Auditors must provide “an annual positive statement” to IFSRA l Bilateral/trilateral meeting to increase liaison with external auditors l Auditors management letters to be sent to IFSRA

The first and third of these points make the delivery of the written reports specified to IFSRA mandatory in the case of every credit union audit. This will require careful consideration and planning by auditors, and guidance as to the format of these reports will be issued shortly by ICAI to assist practitioners. Auditors will also need to consider the cost and fee implications for credit union audits.

Rotation The final element of the IFSRA letter again refers to the critical requirement for demonstrable independence and objectivity on the part of the external auditor of a credit union. The Regulator is insisting that a five year rotation period should apply for audit partners in the case of all credit unions, irrespective of size. This again reflects the view that credit unions are public interest entities. There is an acknowledgement of the need for transition arrangements, and auditors are not required to rotate off credit union clients until the financial year ending September 30th 2007, even if they have accumulated 5 years service before that date. However, from then on, five years is the maximum period of service, clearly posing practical issues for sole practitioners and smaller firms, and for their credit union clients. New auditors should ideally be appointed at the 2006 AGM.

Conclusion IFSRA is concerned that corporate governance in the credit union sector should be of the highest quality. The Regulator sees the external audit as a vital element in such governance, and expressly relies on the external auditor’s reports. External auditors will continue to regard credit unions as public interest entities, with all of the heightened awareness of responsibility and perception that is implied in that term. This is, of course consistent with the requirements of existing ethical guidance and the new proposed Ethical Standards for Auditors, and should already be reflected in auditors’ approach to the sector. Communication with IFSRA will be an ongoing, structured aspect of credit union audits, and arrangements will have to be put in place to achieve an orderly transition when the requirement for rotation of audit partners comes into full effect. Updated credit union audit procedures for both the Republic of Ireland and Northern Ireland are now available from ICAI’s publications department.

Accountancy Ireland Vol 36 No 5 October 2004.