Insight 2005 archives

The newsletter for professional accountants in business

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Auditing board draft "invades" accountants' territory

APB developing ethical standard for reporting accountants. By Martin Nimmo, head of policy and plans, professional standards, CIMA.

The Auditing Practices Board's new draft bulletin on accountants working on investment circulars is the first stage in the development of a full ethical standard for reporting accountants, as distinct from auditors.

To justify this approach the APB quotes from its own Statement of Investment Circular Reporting Standard (SIR) 1000: 'In the conduct of an engagement involving an investment circular, the reporting accountant should comply with the applicable ethical standards issued by the Auditing Practices Board. The reporting accountant should also adhere to the relevant ethical guidance of the professional bodies of which the reporting accountant is a member."

An increasing number of CIMA practising certificate holders are performing certain duties as reporting accountants. This 'invasion' of non-audit territory by the APB is therefore of some interest, although it affects only a handful of Members in Practice.

The APB's remit currently limits its role towards reporting accountants to 'standards and guidance for the work of reporting accountants in connection with investment circulars'. An investment circular is effectively a company prospectus inviting investment.

The APB reminds the reporting accountant of its specific Ethical Standards (ESs) which apply to auditors. It specifies observances that reporting accountants who are not auditors must follow. These could be summarised as the sort of threats identified by the new IFAC Code of Ethics, which is to be recommended for adoption by CIMA from 1 January 2006 (see top story in this edition of Insight). The code proposes safeguards which should be considered to remove or minimise the threats. Members should however be aware of the need to observe the prohibitions contained in ES5.

The provisions of ES5 that apply during the period of the reporting accountant's engagement are as follows:
(a) where judgements and decisions are made that are properly the responsibility of management
(b) where the firm involved would take responsibility for dealing in, underwriting or promoting shares
(c) when corporate finance services are provided on a contingent fee basis where:

the engagement fees are material to the firm, or the part of the firm by reference to which the engagement partner's profit share is calculated or

• the outcome of those corporate finance services (and, therefore, the entitlement to the fee) is dependent on a
• judgement relating to a material balance in the subject matter of the reporting engagement
  

(d) to provide a valuation where the valuation would both:

• involve a significant degree of subjective judgement and
• have a material effect on the financial statements or part of the subject matter of the reporting engagement and
  

(e) to provide accounting services other than in emergency situations.

All these provisions apply where a reporting accountant is engaged to undertake a public or private reporting engagement in connection with an investment circular in relation to which it is intended the reporting accountant will issue a public report.

Where the reporting accountant provides non-audit services before the date of appointment, he or she should consider whether the scope and objectives of those engagements are consistent with the proposed reporting engagement. These considerations include:

• when the non-audit services were provided
• the materiality of those non-audit services to the proposed reporting engagement
• whether those non-audit services would have been prohibited if the client had been an audit client at the time when they were undertaken and
• the extent to which the outcomes of non-audit services have been audited or reviewed by another audit firm.

The reporting accountant should disclose to those charged with governance, and where applicable the sponsor, relevant information on non-audit services that are likely to give rise to a significant threat to independence and objectivity. These include any of the non-audit services set out above.

At the same time, the APB issued SIR 1000 (Investment Reporting Standards Applicable to all Engagements), SIR 2000 (Investment Reporting Standards Applicable to Public Reporting Engagements on Historical Financial Information) and a paper providing feedback on actions taken by the board. Details are on its press release.

August 2005