The European Parliament’s (EP) Committee on Economic and Monetary Affairs (ECON) requested a study to evaluate the supervisory implications of the Wirecard case. It focuses mainly on the challenges of fintech supervision but also discusses the audit angle.
The study highlights the regulators’ needs for a deep understanding of fintech’s technologies and business models. The study suggests an approach combining the oversight of both fintech’s entities and activities.
The study also suggests, given the high level of concentration in the market for auditors of large corporations, a bold approach to achieve strong coordination at the European level, including the creation of a new agency responsible for supervision.
The second study ordered by the EP’s ECON Committee focuses on the supervision of auditors. It concludes that the system of national public audit oversight boards (POBSAs) is fragmented and overly complex, characterised by limited responsiveness to red flags and apparent lack of communication. The study says that stronger supervisory coordination and clear action triggers are necessary.
The study brings many recommendations. It advocates, for example, for:
Other suggestions are made towards international and EU bodies as well as for the POBSA level.
The third ECON Committee study discusses the policy implications of the Wirecard case. The study finds that shortcomings in all lines of defence against corporate fraud – including companies’ internal control systems, external auditors, the oversight bodies for financial reporting and auditing and the market supervisor – contributed to the problem and therefore need reform. To improve the system, the study suggests changes at the national as well as the European level.
The authors make suggestions for the market and institutional oversight architecture in Germany and in Europe to ensure market integrity and investor protection in the future.
The study also highlights weaknesses in the audit sector and provides recommendations to help tackle them.
The European Securities and Markets Authorities’ (ESMA) report focuses on the application of the guidelines on Enforcement of Financial Information (GLEFI) by German Financial Supervisory Authorities BaFin and FREP. It underlines the weaknesses in the German two-tier supervisory system for financial reporting. More specifically, the report identifies deficiencies in relation to:
The European Commission aims to clarify certain existing provisions of Union law about the preparation, auditing and publication of the financial statements drawn-up in accordance with European Single Electronic Format (ESEF) regulation.
The Interpretative Communication contains clarification on Union provisions concerning:
As informed in our previous Audit Update, the Council of the EU had already adopted its position on delaying ESEF implementation. It noted that Member States should be allowed to postpone the application of ESEF requirements by one year.
The Member State option for a delay now depends on the outcome of the trialogue process whereby the EP and Council will try to reach an agreement.
With the financial sector making ever-greater use of information and communications technology (ICT), the risk of cyberattacks is increasing. The EU therefore made proposals to update its rules to ensure that financial-sector ICT systems can withstand security threats and that third-party ICT providers are monitored.
Statutory auditors and audit firms are considered as financial entities (like banks and insurance companies) in the context of this proposed legislation and as such will need to comply with the DORA requirements. Compliance with these requirements might be challenging, especially for smaller audit firms.
This proposed regulation is open for feedback until 14 January 2021.
The International Auditing and Assurance Standards Board (IAASB) recently hosted three virtual roundtables exploring issues and challenges related to fraud and going concern. These roundtables focused on:
The IAASB now published a summary of key themes and messages from the discussions.
On 9 November 2020, the UK Chancellor announced that the UK will be granting a package of equivalence decisions to European Economic Area (EEA) States. To provide clarity and stability to industry, as many decisions as can, will be announced in advance of the end of the transition period provided for under the agreement on the UK’s withdrawal from the EU on 31 December 2020.
Pursuant to this the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) (No. 2) Regulations 2020 (SI 2020 / 1247) drafted by the UK Department for Business, Energy and Industrial Strategy (BEIS) were laid before Parliament on 10 November 2020. The main effect of the Regulations is to grant equivalence status to the EEA States and Gibraltar and to grant adequacy status to their audit competent authorities.
Further details on each of the decisions the UK is making are described in this Policy Paper.
In addition, BEIS hosted a webinar to provide information on the actions needed to prepare businesses and auditors for new rules from January 2021, when the UK leaves EU Customs Union and Single Market. Watch the webinar here
The Financial Reporting Council’s (FRC) Developments in Audit 2020 reports audit quality remained too inconsistent in the most recent round of inspections, with 49 out of 130 audits inspected needing either improvement or significant improvement. The most common finding related to this inconsistency remains the insufficient challenge of the management of audited entities, especially on their forward-looking accounting judgements and estimates. Other areas needing improvement related to the audit of going concern, group audit oversight and quality control over the audit. This came at a time when the importance of high-quality reporting has been emphasised by Covid-19.
As a response to those audit monitoring results, the Government’s consultation on restoring trust in audit, reporting and governance will address the range of changes needed to be made by audit firms, companies, investors, regulators and legislation. In parallel, the UK FRC is moving forward with significant changes to his regulatory approach to drive improvements in audit quality.