Federal Audit Oversight Authority FAOA OVERSIGHT CONCEPT DIVISION FINANCIAL AUDIT Berne, 1 January 2015 Federal Audit Oversight Authority FAOA P.O. Box 6023 CH-3001 Berne, Switzerland Phone +41 31 560 22 22, Fax +41 31 560 22 23 www.rab-asr.ch
CONTENTS 1 Background... 3 2 Principles of Oversight... 4 3 Licensing... 5 4 Routine Inspections... 6 4.1 General... 6 4.2 Process... 7 5 Oversight Report and ad hoc Notification Duties... 8 6 Setting the Standards... 8 7 Collaboration with other Authorities and Stock Exchanges... 9 7.1 Swiss Financial Market Supervisory Authority FINMA... 9 7.2 Stock Exchanges... 9 7.3 Collaboration with Foreign Audit Oversight Authorities... 9
1 BACKGROUND Since the principles of regulation entered into force on 1st April 2008 1, the Swiss Federal Audit Oversight Authority (FAOA) has been responsible for the oversight of state-regulated audit firms 2. External financial reporting by public companies 3 is extremely important for trust in the capital markets: Only where auditors contribute to high quality financial reporting can investors, customers and the authorities make important decisions on a well-founded and adequately informed basis. Oversight of the audit firms that audit public companies plays a significant role in this. This document explains the procedures used by the FAOA in supervising state-regulated audit firms that audit public companies (so-called Financial Audit) 4. The FAOA s concept combines the principles that result from regulatory requirements with the procedures commonly in use internationally. The aim is both effective and efficient oversight. Since 1 January 2015 the FAOA has been responsible for the oversight of the Regulatory Audit (Regulatory Audit FINMA). There is a separate Oversight Concept for this oversight area. 1 2 3 4 The Oversight Ordinance FAOA (OO-FAOA, SR 221.302.33) entered into force on 1st April 2008. Audit firms that provide audit services to public interest entities require a special licence and are subject to state oversight (Art. 7 para. 1 Auditor Oversight Act, AOA; SR 221.302). These companies are those which a) have shares listed on a stock exchange, b) have outstanding bonds, or c) contribute at least 20% of the consolidated assets or turnover of a company in accordance with letter a) or b) (Art. 727 para. 1 Swiss Code of Obligations, CO; SR 220). Article 2 letter c para. 1 AOA. Page 3
2 PRINCIPLES OF OVERSIGHT The oversight activities of the FAOA are based on existing legal principles 5. Since the FAOA also seeks recognition of its activities from foreign oversight authorities 6, it pays regard to international customs and procedures. The FAOA oversight concept in the Division Financial Audit is based on the principle that the quality of audit services to public companies should be raised in cooperation with the audit firms under oversight. The inspection of a state-regulated audit firm is therefore generally carried out as a routine procedure rather than as a formal investigation. The FAOA regards this approach, rather than one based on confrontation, to be a more efficient way of improving audit quality. That being said, the FAOA does have the necessary instruments available to rectify an unsatisfactory situation unilaterally, if necessary 7. As a general rule, a risk-based approach is used in testing whether applicable regulations and standards have been complied with 8. Alongside routine inspections or special inspections prompted by suspected irregularities, preventative measures are also part of the FAOA oversight concept for example publications, presentations and seminars on key issues and inspection results. The FAOA provides information about ongoing and completed proceedings only if necessary for reasons of public or private interest 9. Further information on the FAOA s practices is published in the annual activity report. 5 6 7 8 9 Auditor Oversight Act of 16th December 2005 (AOA; SR 221.302), Auditor Oversight Ordinance of 22nd August 2007 (AOO, SR 221.302.3), Oversight Ordinance FAOA of 17th March 2008 (OO-FAOA; SR 221.302.33), Circular 1/2008 on Approval of Auditing Standards of 17th March 2008, Circular 1/2009 on Detailed Audit Report to the Board of Directors of 19th June 2009 and Circular 1/2010 on Reporting from Audit Firms under State Oversight to the Oversight Authority of 31st March 2010. See also Art. 26 and 27 AOA. cf. Art. 17 para. 2 and Art. 39 and 40 AOA. Art. 8 OO-FAOA. Art. 19 para. 2 AOA. Page 4
3 LICENSING The licence for a state-regulated audit firm is granted upon completion of the FAOA s inspection. For a licence, the quality assurance system and the working papers relating to public company audits must be deemed to be of reasonable quality. State-regulated audit firms are licensed for a five year period 10. If the inspection identifies significant deficiencies in the quality assurance system or audit execution, the FAOA assesses whether the state-regulated audit firm will be able to implement the necessary remedial actions. A licence will be granted or renewed if the remedial actions are deemed to be feasible. In addition, the remedial actions have to be sufficient to assure an effective quality assurance system and the provision of good quality audit services. Should an audit firm infringe legal regulations repeatedly or gravely the FAOA can withdraw the licence for a limited or unlimited period 11. 10 11 Art. 3 para. 2 AOA. Art. 17 para. 2 AOA. Page 5
4 ROUTINE INSPECTIONS 4.1 GENERAL The inspection of state-regulated audit firms includes both formal and substantive aspects. The firm review encompasses checks as to whether the licensing requirements have been met and whether there is a suitable and functional internal quality assurance system. The file review involves the inspection of audit working papers for public company engagements 12 to determine whether quality assurance requirements and applicable professional standards have been met. The Swiss public company audit market is essentially divided between the three largest audit firms 13, which cover the majority of audited public companies in terms of number of companies and market capitalisation. In addition, there are two other audit firms within the Swiss audit market 14 that audit more than 50 public interest entities. These five stateregulated audit firms are subject to an annual inspection to the extent that the FAOA does not deem a multi-year inspection cycle to be reasonable. The other state-regulated audit firms are inspected at least every three years 15. If the FAOA suspects that statutory duties have been infringed it conducts an appropriate investigation. To ensure equal treatment all FAOA inspections are planned, carried out and documented with the aid of a software tool and inspection programmes. The scope and possible focus areas of an inspection are influenced by a number of aspects: Company specific factors (e.g. size and complexity of the state-regulated audit firm and audited public companies), identified risks and the findings of previous inspections all play a role. During the file reviews a sample of selected areas is examined. Not all working papers are reviewed. Given this, the work performed by the FAOA cannot be compared to a second audit. The FAOA carries out thematic inspections if required. 12 13 14 15 In the case of audit firms that have voluntarily subjected themselves to oversight, the Oversight Authority shall inspect audit services provided to companies that are not public companies (Art. 33 para. 1 AOO). Ernst & Young Ltd., KPMG Ltd. and PricewaterhouseCoopers Ltd. Deloitte Ltd. and BDO Ltd. Art. 16 para. 1 AOA and Circular 1/2010 para. 8. Page 6
4 ROUTINE INSPECTIONS 4.2 PROCESS The following diagram summarises the process of a routine inspection: ANNOUNCEMENT 16 As a rule, the audit firm is informed that an inspection is to take place. Such notification may be waived if necessary for the purposes of the inspection. PERFORMANCE 17 a) Examine the accuracy of information furnished in connection with the audit licence. b) Examine the quality assurance system of the firm ( firm review ). The requirements of a quality assurance system depend on applicable accounting standards 18. The design of a quality assurance system depends on its size and the engagement structure. c) Determine proper audit execution at public companies 19 ( file review ) according to key risk areas 20. CONCLUSION a) Communicate findings to the audit firm under state oversight and draw up inspection report 21. b) Agree or, if necessary, impose measures to rectify identified defects and subsequently check full and timely implementation of those measures 22. 16 17 18 19 20 21 22 Art. 9 OO-FAOA. Art. 16 AOA. cf. Art. 2 OO-FAOA and Circular 1/2008. Art. 16 para. 2 letter c AOA and Art. 12 OO-FAOA. The focus areas are amongst other published in the FAOA activity report (www.rab-asr.ch). Art. 16 para. 3 AOA. Art. 16 para. 4 AOA. Page 7
5 OVERSIGHT REPORT AND NOTIFICATION DUTIES In years where no inspection takes place state-regulated audit firms are required to submit an oversight report 23 to the FAOA by 30th September. The report is to provide a comprehensive insight into the activities of the audit firm. The FAOA can thereby determine whether the licensing conditions have been met, whether independence is safeguarded and whether the quality of audit services is assured. The state-regulated audit firms are also required to submit immediate ad hoc notifications under certain circumstances 24. 6 SETTING THE STANDARDS The FAOA determines the auditing standards which state-regulated audit firms have to comply with when auditing public companies 25. In so doing, the FAOA refers to nationally and internationally accepted standards. If there are no such standards, or if those which do exist are inadequate, the FAOA can issue its own standards, or add to or annul existing standards. 23 24 25 Art. 30 AOO. The nature and scope of the oversight report are detailed in Circular 1/2010. Art. 15 AOA. Furthermore, the matters set out in Circular 1/2010 are to be reported immediately. Art. 16a para. 2 AOA and Circular 1/2008 on the recognition of auditing standards. Page 8
7 COLLABORATION WITH OTHER AUTHORITIES AND STOCK EXCHANGES 7.1 SWISS FINANCIAL MARKET SUPERVISORY AUTHORITY FINMA The legislator requires the FAOA and the other oversight authorities established in accordance with specific legislation to coordinate their oversight activities to avoid duplication, particularly as regards the Regulatory Audit 26. The cooperation extends to the audit of public companies if necessary for the enforcement of the respective law. Since 1 January 2015 the FAOA has been responsible for the oversight of the Regulatory Audit. A separate Oversight Concept exists for this area of FAOA oversight. 7.2 STOCK EXCHANGES The FAOA and the stock exchanges are obliged to coordinate their oversight activities 27. As the only stock exchange in Switzerland, the SIX Exchange Regulation (SER) carries out supervisory activities over issuers in the area of compliance with accounting standards. If an issuer is sanctioned by SIX over its audited statutory or consolidated financial statements the FAOA investigates the role of the auditor. The FAOA investigates whether statutory and professional audit requirements have been met not whether accounting standards have been correctly applied. Conversely, the FAOA informs the SER of pending cases and rulings which could be of concern to the SER 28. 7.3 COLLABORATION WITH FOREIGN AUDIT OVERSIGHT AUTHORITIES The audit oversight authorities are primarily national authorities whose powers end at their respective national borders. However, the internationalisation of large audit networks forces audit oversight authorities to coordinate and harmonise their oversight activities at an international level. Only increased cooperation and mutual recognition can produce an international oversight system that eliminates the disadvantages of a purely national focus. The FAOA has already concluded cooperation agreements, memorandums of understanding and protocol declarations with many foreign audit oversight authorities. The FAOA is a member of the International Forum of Independent Audit Regulators (IFIAR) 29. The IFIAR promotes international cooperation and knowledge exchange among its members, while respecting national frameworks. 26 27 28 Art. 22 para. 1 AOA. Art. 23 para. 1 AOA. Art. 23 para. 2 AOA. 29 Further information can be found at www.ifiar.org. Page 9