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Established under the Companies (Auditing and Accounting) Act, 2003, the Irish Auditing & Accounting Supervisory Authority (IAASA) has been officially up and running since January of this year. Based in brand new offices in the Millennium Business Park in Naas, Chief Executive Ian Drennan is clearly looking forward to getting cracking on IAASA's work programme. In fact, he told Accountancy Ireland, work on many key aspects of IAASA's full agenda was already well under way by the time the Authority was placed on a statutory footing.

PROTECTING THE TERM ACCOUNTANT I began by asking Mr. Drennan about an issue that has long been a thorn in the side of the profession, namely the use of the term ‘accountant’ by non qualified and unregulated self styled ‘accountants’. ICAI has been lobbying on this issue for quite some time so was quick to welcome Minister Ahern’s recent initiative asking IAASA to consider the whole issue of the legal protection of the term ‘accountant’. In response to the Minister’s request, IAASA has initiated a review of the issue, which will include a public consultation process whereby interested parties’ views will be invited. Commenting on the merits of the argument that protection should be introduced, Mr. Drennan says “Most reasonable people would, I suspect, accept the argument that a person shouldn’t be permitted to hold themselves out to the public as being an ‘accountant’ unless they have undergone a course of professional training and obtained the requisite level of professional experience. That having been said, in the event that legal protection were to be introduced, primary legislation would be required and defining the term in statute would not be without its complexities.” According to Mr. Drennan, the questions that IAASA will be seeking interested parties’ views on will include: -whether, in the event of legal protection being introduced, members of accountancy bodies other than the nine prescribed bodies should come within the definition of ‘accountant’; and -in the event that the term were to be protected and defined to include persons other than members of the prescribed bodies, whether, and if so how, such persons should be subject to supervision and/or regulation. He adds “As any legislative move to protect the term would have adverse implications for unqualified persons currently deriving an income from the provision of relevant services, the Authority will also be considering whether, in the event of such action being taken, the provision of transitional arrangements would be appropriate.”

SMALL COMPANY AUDIT EXEMPTION

Asked to comment on the current small company audit exemption limit in the context of the cost implications of the introduction of International Standards on Auditing (ISAs), as well as in the context of the disparity between the limits that currently apply in Ireland and Northern Ireland, Mr. Drennan says that IAASA - which has a statutory role as an advisor to the Minister - has an open mind on the issue. In the context of the considerations referred to above, he sees merit in the case that the ICAI has been making but adds that “any significantly revised arrangements - which would require amending primary legislation - would, in IAASA’s view, have to strike an appropriate balance between those, quite valid, considerations and the public interest nature of the statutory audit”. Mr Drennan cites research undertaken by the EU Commission which indicates that, were the turnover threshold to be increased to the current maximum permissible level under EU law (€7.7m), approximately 94% of Irish companies would no longer require the performance of a statutory audit. “I suspect that even the strongest advocates of raising the current threshold would agree that an increase of this magnitude would not be in the public interest”, he suggests. He adds that the matter has also recently been raised at the Company Law Review Group - where both IAASA and the profession are represented - and is likely to be considered in the context of the Group’s current company law consolidation and reform project. Concluding on this topic, he says “The Authority is also aware that ICAI is currently working on a submission to Government on this topic and we look forward to considering same.” 2003 COMPANIES ACT AND THE 8TH DIRECTIVE

Given that some sections of the 2003 Act have not yet been commenced, I asked Mr. Drennan whether, in the context of transposing the 8th Directive into Irish law, it might make sense either to delay commencement or perhaps to bring forward the transposition of the revised 8th Directive - so as to avoid subjecting accountants to differing requirements over a relatively short time-frame. He responds by saying that all but one of those sections of Part 2 of the Act (which deals with IAASA) have been commenced at this time. “Accordingly, while the revised 8th Directive - which provides for, among other things, the establishment of auditor oversight systems in all Member States - does not have to be transposed into domestic legislation for two years, Ireland’s oversight regime is already in place and operational.” In any event Mr Drennan does not anticipate transposition of the revised Directive until well into the two year transposition period.

“The transposition period has not yet begun and, moreover, the revised Directive presents significant challenges at both individual Member State and EU level. At a domestic level, the provisions regarding registration of 3rd country auditors are likely to be a significant issue for Ireland as a consequence of the number of third country issuers listed here”

“Recent research that we have conducted for the EU Commission, with the assistance of the Irish Stock Exchange, suggests that we could conceivably be looking at having to register upwards of 120 3rd country audit firms. At a broader EU wide level, the Directive gives rise to a number of significant issues, including assessment of the equivalence of 3rd countries’ oversight systems, facilitation of cross border information sharing arrangements and the adoption of international standards on auditing.” “In preparation for transposition, the EU Commission has recently taken a decision to establish a European Group of Auditors’ Oversight Bodies (EGAOB) - of which IAASA is a member - to facilitate and promote co-operation between oversight bodies and also to provide expert advice to the Commission and Member States’ governments on relevant issues arising”, he added.

FINANCIAL REPORTING REVIEW

Section 26 of the 2003 Act, which provides for IAASA’s financial reporting review function, is the one section that remains to be commenced. Clearly Mr. Drennan and his Board colleagues will have had an eye on developments elsewhere - particularly in the UK in carrying out this function. In light of that, I asked whether their intention will be to operate on much the same basis as the FRRP in the UK and when this function will commence. “The Interim Board of the Authority, in conjunction with the Department of Enterprise, Trade & Employment took the view some time ago that, for a variety of reasons, the most appropriate approach to giving effect to the Act’s provisions was to elect for phased commencement. The financial reporting supervision element of the Authority’s remit is unarguably the most complex for a number of reasons. Firstly, in contrast with supervision of the accountancy bodies, the constituency is not known with certainty and, by virtue of the inclusion of monetary thresholds in the definition of a ‘relevant undertaking’, will change from year to year. Secondly, the Act provides for the imposition of a levy on the review constituency or elements thereof. The uncertainty regarding the composition of the constituency renders the imposition of a levy more problematic. Thirdly, by virtue of the inclusion of listed plcs in the constituency, we are faced with having to supervise financial statements prepared under IFRS at a time when it is new to preparers, auditors and many other regulatory bodies and when expertise in the field is in high demand and short supply.” He goes on to say, “We have commissioned research with a view to ascertaining the scale of the review constituency and this research, which is proving to have its fair share of challenges, is at a relatively advanced stage. Similarly, we are considering a number of options with regard to the imposition of a levy. The considertions that we will have regard to in that context will include - relative risk, potential for impact, cost/benefit considerations, legal advice that we have received and the approaches that our counterparts have adopted in this regard.” For readers engaged in the sectors likely to be affected by IAASA’s financial reporting review remit, Mr. Drennan has some words of reassurance.

“The Authority will be engaging in an extensive consultative exercise with interested parties and seeking their views on a range of relevant issues. Only having undertaken this exercise will the Authority be presenting detailed proposals for levy apportionment to the Minister for his consideration and, if deemed appropriate, approval.”

CO-OPERATING WITH EU COUNTERPARTS Mr. Drennan is also keen to point out that IAASA is, and has been for some time, working with its EU financial reporting enforcement counterparts in the context of IFRS. The Authority is a member of the EECS (European Enforcement Co-ordination Sessions), a forum established under the auspices of CESR (the Committee of European Securities Regulators). CESR has been charged with taking the lead in bringing about consistent application and enforcement of IFRS across the EU. Through its participation in the EECS, IAASA participates in the examination of potential enforcement cases across the EU as they arise and also has access to a confidential database of enforcement decisions in the EU relating to IFRS. “This database allows IAASA and other Member States’ authorities, when arriving at their own enforcement decisions, to consider how similar issues have been dealt with by their counterparts, thereby facilitating the development of a consistent approach to enforcement over time.” On the question of whether IAASA will be adopting a similar approach to its UK counterparts, Mr. Drennan says “The FRRP’s approach of seeking to resolve issues by consensus rather than seeking recourse to enforcement in every instance is one that appeals to us.”

“We have met with FRRP staff on several occasions with a view to better understanding their philosophy and methodologies. As we have previously said, we will, where possible and appropriate having regard to the specifics of a case, seek to discuss issues arising with relevant entities’ directors with a view to reaching a mutually satisfactory resolution. It is, therefore, likely that the Authority would only seek recourse to formal enforcement action where such an approach had not proven successful or where the issue in question was a significant matter deserving of public airing.” Another issue directly linked to IAASA’s review remit is section 41 of the 2003 Act, which allows the Minister to prescribe one or more bodies as accounting standard setters. Compliance with prescribed standard setters’ standards will, once section 41 has been commenced, be required and IAASA is in close liaison with the Department of Enterprise, Trade & Employment regarding the standard setter(s) that will be prescribed for this purpose. On a related issue, the Authority is continuing to develop its relationships with relevant standard setters and has recently been granted observer status by the Accounting Standards Board.

ACCOUNTANTS' REPORTING OBLIGATIONS & THE SUDIT EXPECTATION GAP

Mr. Drennan was one of the speakers at a Regulators’ Conference organised by ICAI late last year. At that conference, Deloitte Partner and member of the Auditing Practices Board, Ronan Nolan, discussed the profession’s concerns about the multiplicity of reporting requirements on accountants, and highlighted areas of inconsistency. He revisited this theme in the February edition of this magazine. Asked to comment, Mr. Drennan says “The accountancy profession is held in high esteem in terms of the level of independent assurance that its members provide, hence the proliferation of multiple reporting obligations on accountants and auditors.”

“However, it equally the case that those who propose to introduce new reporting obligations have a duty to apprise themselves of the scope of the statutory audit, or other relevant assurance engagement, and the extent to which these engagements can deliver in the context of proposed reporting obligations. “Similarly, it is not unreasonable that, to the extent practicable within the relevant legislative framework, there should be consistency in the nature and format of reporting obligations, thereby assisting members of the profession to discharge their legal obligations. “The whole question of reporting obligations - and what they can and cannot deliver - raises the age old issue of the audit expectation gap, a topic to which APB has given some detailed considered in recent times. “From IAASA’s perspective, deficient performance, where it exists, is a matter for the recognised bodies to address, under the Authority’s supervision. With the relatively recent application of ISAs (UK and Ireland) in Ireland, it is hoped that any deficiencies, or perceived deficiencies, in extant standards will be addressed by the IAASB’s ongoing clarity and improvement project, and IAASA, through the EGAOB, has a means of contributing to the EU Commission’s input to that process. “The final component of the audit expectation gap - unrealistic expectations - is arguably the most difficult to address and requires a collective effort on the part of the profession, regulators and standard setters. For its part, IAASA is happy and willing to work with others and contribute to addressing this element of the equation.”

IAASA FUNDING

The funding structure of IAASA was a thorny issue some time back. IAASA is part funded by the accountancy profession (60%) and part by central government. Asked whether he has concerns about the potential impact of that funding structure on the authority’s future work programme, Mr. Drennan says “It is fair to say that the profession was not particularly enthused at the prospect of having to contribute 60% to the Authority’s operating costs. However, that subject is now closed and the nine professional bodies have, I’m happy to say, unanimously agreed to a model that provides for a fair and equitable apportionment of their respective contributions. That having been said, conceivably, the current funding model could require amendment in the future if the Authority’s remit were to be broadened. For example, if accountants other than those who are members of the prescribed bodies were to be brought within the Authority’s remit, the manner in which those aspects of our supervisory work would be funded would undoubtedly become an issue. Similarly, the Authority’s oversight of 3rd country auditors - when that becomes an issue on transposition of the 8th Directive - will be likely to have implications for the current funding model. “Aside from those considerations, one can never anticipate what might occur in the future - our counterparts in the UK, the Professional Oversight Board for Accountancy, have, for example, recently been given responsibility for overseeing the actuarial profession. Were something similar to occur in Ireland, clearly the current funding model would have to be revisited.” Asked about the sufficiency of IAASA’s funding, Mr. Drennan says “Whether our current approved professional staffing levels are adequate is something that we will be closely monitoring. However, our first priority in that regard is to complete the recruitment of our full approved complement, something that is proving difficult in this challenging employment market.” He goes on to say that “The Authority proposes to build up a Reserve Fund of €500,000 over its first three years. Accordingly, if something were to happen that required us to initiate a major investigation, we would hope to be adequately covered. In determining the level of funding required for that purpose, we did have regard to a number of factors including that, under the Act, the primary onus for conducting investigations into members of the profession continues to reside with the accountancy bodies and to the level of reserve fund maintained by our UK colleagues in the Financial Reporting Review Panel (FRRP), which they have yet to have had occasion to call upon.”

AREAS OF CORPORATE LIFE STILL IN NEED OF IMPROVEMENT?

Prior to his IAASA appointment, Mr. Drennan headed the Compliance function at the Office of the Director of Corporate Enforcement (ODCE). I asked about his experience in that role, and whether, in his view, there are areas of Irish corporate life that still require improvement. “A substantial element of my role with the ODCE was the provision of information and education to company directors, as well as having had an input to, for example, the development of guidance on auditors’ obligation to report suspected indictable offences to that Office - a project that was a good example of the authorities working closely with the profession to our mutual benefit. “ One of the areas that was identified during my tenure as requiring greater awareness on the part of directors was that of directors’ loans. Breaches of section 31 of the 1990 Act had become a recurrent feature in auditors’ reports and we took steps to address this by embarking on a significant education and awareness programme, supplemented by the publication of guidance.”

INFORMING THE PUBLIC Applying that experience to his current role, he says: “One of our aspirations is to ensure that members of the public having dealings with the profession are sufficiently well informed to make appropriate decisions and avoid unnecessary risks.”

“For example, our website (www.iaasa.ie) already provides information as to how members of the public can satisfy themselves that a practitioner is qualified to act as a auditor and we will be building on that information resource over time.”

OTHER ISSUES

Mr. Drennan is aware of what he describes as ‘a degree of trepidation on the part of the profession as to what IAASA will mean for them’. He says that he has been asked by practitioners, for example, whether IAASA will be conducting visits to the offices of practising firms. What he would seek to stress in response is that what IAASA is doing has two sides. “Firstly, to provide an additional level of assurance to the public that the profession is regulating and monitoring itself in an appropriate manner and to a satisfactory and consistent level. Equally however, it works the other way, for example, where a member of the profession has been subjected to unfair or disproportionate treatment or to a vexatious allegation, it is equally the Authority’s role to ensure that the actions taken are appropriate to the circumstances.” In conclusion, Mr. Drennan says IAASA’s aspirations include achieving a recognition on the part of the profession that independent oversight has tangible benefits for it in terms of consistent standards of regulation and monitoring across the professional bodies and enhanced reputation and public confidence as well as a greater degree of protection for members of the public.