Transparency of Firms that Audit Public Companies Consultation Report Comment Letters TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS OR07/10 OCTOBER 2010 IOSCO Consulting Paper Transparency of Firms that Audit Public Companies List of Comment Letters Received No. Respondent Organization 1. Basel Committee on Banking Supervision 2. Canadian Public Accountability Board 3. The Compagnie Nationale des Comissaires aux Comptes (CNCC) 4. Conway, Robert – Individual CPA 5. Deloitte Touche Tohmatsu 6. Dubai Financial Services Authority 7. European Group of International Accounting Networks and Associations 8. EUMEDION Corporate Governance Forum 9. Ernst & Young Global Limited 10. FAR SRS (The Institute for the Accountancy Profession in Sweden) 11. Federation of European Accountants 12. Financial Reporting Council 13. Grant Thornton International Ltd. 14. The Institute of Chartered Accountants of Scotland (Audit and Assurance Committee) 15. Instituto De Censores Jurados De Cuentas De Espana 16. Institut der Wirtschaftsprufer 17. International Federation of Accountants 18. KPMG International 19. The Nordic Federation of Public Accountants 20. PricewaterhouseCoopers LLP 21. SEC Thailand Chairman Via email: [email protected] Mr Greg Tanzer Secretary General IOSCO General Secretariat Calle Oquendo 12 28006 Madrid Spain 14 January 2010 Public Comment on the consultation report "Transparency of Firms that Audit Public Companies" Dear Mr Tanzer The Basel Committee welcomes the opportunity to provide a general comment on IOSCO’s consultation report Transparency of Firms that Audit Public Companies. The Committee has a strong interest in high-quality audits of published financial statements. This is because high-quality audits of banks complement supervisory processes and increase supervisory efficiency. This notion has been firmly established in our paper, External audit quality and banking supervision, which was published in December 2008. The Committee’s External audit paper recognises that the vast majority of banking assets are audited by the four largest globally active accounting firms. It notes “The large globally active firms do not provide sufficient public information about how the firms are managed on a global basis, how audit quality is assured at the global level, or about their world-wide overall financial condition and profitability.”1 Understanding how globally active accounting firms are governed is necessary to ensure that there is sufficient audit quality maintained in these organisations’ that audit banks. The Committee, therefore, welcome your consultative report on transparency of firms that audit public companies, and looks forward to seeing the results of the consultation. We believe it would also be mutually beneficial for the audit sub- groups of the Basel Committee and IOSCO to meet and discuss the results of the consultation and other audit quality issues of common interest. 1 External audit quality and banking supervision, page 14. This report is available at www.bis.org/publ/bcbs146.htm. Centralbahnplatz 2 · CH-4002 Basel · Switzerland · Tel: +41 61 280 8080 · Fax: +41 61 280 9100 · [email protected] 1/2 This letter has been prepared by the Committee’s Accounting Task Force, chaired by Mrs Sylvie Mathérat, Director of the Banque de France, and has been approved by the Committee. If you have any questions regarding this letter, please feel free to contact Mrs Mathérat (+33 1 4292 6579), Marc Pickeur who chairs the Audit Subgroup of the Accounting Task Force (+32 2 220 5253) or Rob Sharma at the Basel Committee Secretariat (+41 61 280 8007). Yours sincerely Nout Wellink Centralbahnplatz 2 · CH-4002 Basel · Switzerland · Tel: +41 61 280 8080 · Fax: +41 61 280 9100 · [email protected] 2/2 January 13, 2010 Mr. Greg Tanzer Secretary General IOSCO General Secretariat Calle Oquendo 12 28006 Madrid Spain Dear Mr. Tanzer: Re: Public Comment on the Transparency of Firms that Audit Public Companies: Consultation Report The Canadian Public Accountability Board (CPAB) is pleased to comment on the consultation report “Transparency of Firms that Audit Public Companies”. CPAB is very supportive of the work being performed by the International Organization of Securities Commissions (IOSCO) to explore ways to improve audit quality and we compliment IOSCO on the high quality of the consultation report. In light of the challenging economic climate and audit fee pressures that many firms are currently facing it is all the more important that firms maintain a focus on audit quality. Audit Quality Audit quality is subjective in nature and in our experience is best evaluated based on key drivers/indicators of audit quality, many of which have been highlighted in the consultation report. However, caution has to be exercised when evaluating data obtained from firms to ensure there is consistency when comparing firms and to ensure that data is being interpreted appropriately. For example, if a firm is obtaining new public company audit clients this may be more due to the firm’s competitive pricing rather than superior audit quality. Increased competition amongst firms based on audit quality is a desirable goal and we believe more research and analysis is required on the best ways to achieve this. We also note that the International Auditing and Assurance Standards Board (IAASB) has an Audit Quality project proposal scheduled for June 2010. In our view, it makes sense for international bodies such as IAASB, IOSCO and IFIAR (International Forum of Independent Audit Regulators) to have a coordinated approach to develop ways to improve audit quality. Transparency of Audit Firms In discussions on transparency of audit firms it is important to focus on the key objectives of increased transparency. A key objective should be to drive positive changes in behaviour such that audit quality is improved. However, if firm disclosures are too high level there is a risk of these becoming boiler-plate with very little to distinguish one firm from another in areas such as audit quality. It is important the appropriate disclosures are developed so that audit quality may be meaningfully compared and improved. With increased globalization of the major accounting firms it is especially critical for regulators to understand global networks and how quality control systems are implemented, maintained and monitored. CPAB has an effective working relationship with the firms it inspects and receives a high level of cooperation from the firms. Increased transparency should not negatively impact firm cooperation with audit regulators and firm responsiveness to audit regulator findings and recommendations to improve audit quality. In certain areas it may be more effective for audit regulators to “monitor” firms and related risks as opposed to making public disclosure. In conclusion we reiterate our support for the work being performed on audit quality and audit firm transparency and we appreciate the opportunity to provide input on the consultation report. We would be pleased to discuss any of the above comments. Yours very truly, Brian Hunt, FCA Chief Executive Officer International Organization of Securities Commissions Response to Request for Public Comment on Transparency of Firms that Audit Public Companies November 25, 2009 My name is Robert Conway. I am a licensed Certified Public Accountant in the United States and a retired Big Four audit partner. I am also an employee of the Public Company Accounting Oversight Board (“PCAOB” or “the Board”). The views I express herein are my own and do not necessarily reflect those of the Board, Board Members, or other members of the PCAOB staff. Prior to joining the PCAOB in 2005, I had a 26+ year career with one of the Big Four public accounting firms, including 17+ years as an audit partner. I am also the author (identified at the time only as the “Anonymous Retired Audit Partner”) of the recommendation1 to the United States Treasury Department’s Advisory Committee on the Auditing Profession (“ACAP”) that audit firms be required to publicly report certain operational metrics which I referred to as “Audit Quality Drivers.” The thinking behind this recommendation was that the operational metrics of competing audit firms would be of interest to the purchasers of audit services and competitive forces would drive audit firm leaders to improve their operational metrics in a direction conducive to improving audit quality. After all, what audit firm leader would want to be in last place when the metrics are published and what audit committee would desire to engage an audit firm with the least desirable blend of operational metrics? The six metrics I proposed in my ACAP recommendation and the desired direction of improvement are summarized below: Audit Quality Driver / Metric Desired Direction of Improvement Years experience after CPA licensing >>> More experienced professionals Percentage staff turnover during year >>> Better continuity year over year Chargeable hours per professional >>> More reasonable staff workloads Chargeable hours managed per partner >>> More reasonable partner workloads Ratio of audit staff to partners >>> Better supervision Training hours per professional >>> Increasing technical excellence My recommendation to ACAP has been widely regarded as having provided the impetus for ACAP’s recommendation that the PCAOB determine the feasibility of developing key indicators of audit quality and the effectiveness of requiring audit firms to publicly disclose these indicators.