239100 aci quarterly 31 web - kpmg...8 audit committee institute sponsored by kpmg 1. be proactive...

Quarterly 31

Audit Committee Institute Sponsored by KPMG

Ten principles of effective audit committee oversight

Audit value and quality is key

Cash and liquidity forecasts are not just for going concern reviews

Key questions for audit committees

Ministry of Justice consults on its lsquoadequate proceduresrsquo guidance

Financial reporting update

2 Audit Committee Institute

Sponsored by KPMG

About the Audit Committee Institute Recognising the importance of audit committees the Audit Committee Institute (ACI) has been created to serve audit committee members and help them to adapt to their changing role Sponsored by KPMG the ACI provides knowledge to audit committee members and is a resource to which they can turn for information or to share knowledge

For more information on the work of the ACI please click on our web site wwwkpmgcoukkpmgaci

or contact

Timothy Copnell

Associate Partner Audit Committee Institute KPMG LLP (UK) 15 Canada Square London E14 5GL

Tel 020 7694 8855 e-Mail auditcommitteekpmgcouk

copy 2010 KPMG LLP a UK limited liability partnership is a subsidiary of KPMG Europe LLP and a member fi rm of the KPMG network of independent member fi rms affi liated with KPMG International Cooperative a Swiss entity All rights reserved

Audit Committee Institute

Sponsored by KPMG 3

Contents

Introduction 4

Ten principles of effective audit committee oversight 6

Audit value and quality is key 10

Cash and liquidity forecasts are not just for going concern reviews 14

Key questions for audit committees 18

Ministry of Justice consults on its lsquoadequate proceduresrsquo guidance 20

Financial reporting update 21



Sponsored by KPMG 4

Introduction



Sponsored by KPMG

Welcome to the thirty-first edition of the UK Audit Committee Institute Quarterly ndash the publication designed to help keep audit committee members abreast of regulatory matters company law accounting and audit issues and changes in the corporate governance arena

In this issue of the ACI Quarterly we begin by looking at Ten principles of effective audit committee oversight that appear in a new Blue Ribbon Commission report that has been issued by the National Association of Corporate Directors Next Timothy Copnell Audit Committee Institute discusses the European Commissionrsquos recent green paper on audit policy in Audit value and quality is key

The issue of cash management is discussed in our article Cash and liquidity forecasts are not just for going concern reviews and this is followed by a look at the Financial Reporting Councilrsquos Key questions for audit committees We also provide a briefing on the Ministry of Justicersquos consultation regarding the UK Bribery Act 2010 in Ministry of Justice consults on its adequate procedures guidance

This edition of the Quarterly finishes with our regular financial reporting update

I encourage all readers to support the ACI We each fulfil our own role but by working together to raise awareness and share knowledge we can all help ensure we adopt leading practice in our roles as audit committee members

I hope this publication serves its intended purpose of briefing you on the important developments affecting your role as an audit committee member If you require further information the ACI web site (wwwkpmgcoukaciindexcfm) provides additional information including the previous editions of the UK ACI Quarterly and other useful publications surveys and information Q31

Oliver Tant

Head of Audit KPMG in the UK



Sponsored by KPMG



Sponsored by KPMG 7


A new Blue Ribbon Commission (BRC) report has been issued by the National Association of Corporate Directors (NACD) on the Audit Committee The report was developed in conjunction with the Audit Committee Institute in the US and provides a comprehensive discussion on audit committee responsibilities and composition

Perhaps the most interesting part is the ten principles of effective audit committee oversight which the BRC believe provide a foundation for engaged and effective audit committee oversight



Sponsored by KPMG

1 Be proactive in focusing the

agenda on what is important

ndash financial reporting risk ndash

and make the most of audit

committee meetings

2 Insist on transparency 3 Focus closely on external

both external and internal financial communications ndash

ndash among the audit committee beyond the annual and interim

management and the internal reports

and external auditors

Ensuring that the audit committeersquos agenda appropriately addresses the issues that require the audit committeersquos attention can be a major challenge Develop focused (yet flexible) agendas with an eye on the companyrsquos key financial reporting risks To improve the efficiency of committee meetings insist on quality pre-meeting materials spend less time on low value or checklist activities and engage in discussions rather than listening to presentations Do not let compliance activities crowd out substantive discussion In short have more QampA and less PowerPoint ndash and beware of mission creep

4 Question the continuing validity

of assumptions that underlie

critical accounting judgements

and estimates and be up to

speed on key financial reporting

issues and developments

affecting the company

Good external transparency ie from the investorrsquos standpoint hinges on achieving internal transparency including information quality and flow and communications between the board and management auditors and other key players in the organisation Consider whether the information the committee receives is balanced and from a variety of resources Getting the right information is essential to providing effective oversight of the companyrsquos financial reports risks internal controls and finance team

5 Assess the audit committeersquos

role in the oversight of risk

management with an eye to

clarifying the scope

Earnings releases often pose more issues than the financial statements because they contain important business information which often does not come from the financial reporting system and is not audited If you havenrsquot already done so ndash given the uncertainties created by the economic crisis ndash reconsider the types of earnings guidance the company issues Engage early on in reviewing the companyrsquos disclosures Obtain the input of management regarding disclosures contained in the annualinterim reports (as well as related disclosures in earnings releases shareholder correspondence and presentations to analysts)

6 Set clear expectations for the

external and internal auditors

From fair value accounting to the convergence of US GAAP and IFRS to critical accounting policies judgements and estimates an ongoing challenge for audit committees is to understand important financial reporting issues and developments affecting the company Take a close look at managementrsquos assumptions underlying all critical accounting estimates and assess whether these assumptions are reasonable in light of current economic conditions Set aside time at each committee meeting or at least periodically for a deep dive into a specific financial reporting issue or development impacting the company

The tremendous focus on risk today is an opportunity for the board to reassess the role of the audit committee (and the full board and the other standing committees) in overseeing risk based on the unique needs of the company and industry Consider whether the audit committee has the expertise and time to deal with strategic operational and other risks and whether the expertise of other board members is being leveraged Audit committees already have a lot on their plates with oversight of financial reporting risks

The audit committee relies heavily on the internal and external auditors ndash their insights technical capabilities judgement and independence ndash who together provide lsquochecksrsquo on management Encourage (and expect) frequent informal communications with the audit engagement partner Meet the engagement partner prior to each committee meeting ndash or even more frequently ndash to consider the issues that should be on the committeersquos agenda and to stay abreast of developments Ask to receive important information on a real time basis Work with the Head of Internal Audit to determine whether internal audit has appropriate resources and is properly focused on key areas of risk ndash ie that the annual internal audit plan is risk-based and focuses on the critical risks to the business ndash not just compliance and financial risks



Sponsored by KPMG

7 Make sure the CFO and the 8 Assess the tone at the top and

entire finance function as well throughout the organisation

as internal audit have what including the effectiveness

they need to succeed and be of compliance and anti-fraud

sensitive to the strains on these programmes

departments

In this highly charged and uncertain business environment the demands of the economic crisis resource constraints and pressures to meet performance expectations have all exacerbated the normal rigours of the CFOrsquos and finance teamrsquos jobs Audit committee support of the CFO and finance team has become more critical support them by helping them to maintain focus on the long term financial performance by injecting objectivity into financial disclosures and by ensuring that the tactical and strategic financial reporting initiatives undertaken by the CFO and the finance team have the right level of prioritisation and resources

9 Help link change and risk

management and monitor

critical alignments

(controls and risks)

The economic downturn has placed tremendous pressure on management to achieve operating results at the same time cost cuts and workforce reductions may have exacerbated these pressures How has the company treated its employees How do the employees think theyrsquove been treated Insist on a periodic comprehensive review of the companyrsquos anti-fraud and compliance programmes Promote a culture of compliance and financial reporting integrity throughout the organisation and insist that the tone set by senior management is clear unambiguous and consistent

10 Take a hard look at the audit

committeersquos effectiveness

including its composition and

leadership and find ways to

continuously improve

For further information on the work

of the NACD

Please visit httpwwwnacdonlineorg

Change creates risk During times of dramatic change the risk of misalignment ndash of the companyrsquos strategy goals risk controls compliance incentives and people ndash goes up exponentially Given the audit committeersquos role in overseeing risk internal controls compliance and ultimately the impact of significant changes on the companyrsquos financials the committee is in a unique position to help reduce the risk of misalignment

Count on increased expectations for good governance and effective oversight and focus squarely on opportunities to improve In the committeersquos self evaluation process pay attention to the basics like having the right mix of committee member experiences and skill sets committee independence and leaderships an understanding of the companyrsquos strategy and risks and the adequacy of resources and support for the audit committee If you do not get the basics right your ability to ask the right questions and challenge management is critically limited Q31




Sponsored by KPMG 10

The European Commission (EC) Green Paper lsquoAudit Policy Lessons from the Crisisrsquo ndash released in October 2010 ndash recognises that audit is a key contributor to financial stability and to re-establishing trust and market confidence and that auditors have an important ldquosocietal rolerdquo in offering an opinion on whether the financial statements give a true and fair view



Sponsored by KPMG

However the Green Paper identifies a number of areas where the EC believes there is cause for concern including the role of the auditor

the governance and independence of audit firms and the structure of the audit profession particularly the concentration of major audit firms

The Green Paper also identifies ways of strengthening cross-border audit firm supervision and the possibility of creating a single European market for

audit firms And finally it considers the specific case of Small and Medium sized Enterprises (SMEs)

Of particular concern to audit committees the proposals appear to start with the presumption that the auditor audit committee relationship is broken and that

directors cannot be trusted to play a meaningful role in the appointment of auditors or control their use in the provision of non-audit services



Sponsored by KPMG

Role of the auditor

The Commission looks at the role of the audit beyond the financial statements Whilst it recognises the importance of forward looking information it states that given the coverage by equity analysts and credit rating agencies the role of the auditor should be ldquoextended in this direction only if there is real value added to the stakeholdersrdquo The Commission is also consulting on whether audits should extend to the financial health of the company or CSR

The Commission acknowledges that an audit only provides ldquoreasonable assurancerdquo that financial statements are free from material misstatement and that audit work has evolved from a substantive verification of transactions and balances to a risk-based controls approach ndash but goes on to question whether this creates an expectation gap and whether a ldquoback to basics approachrdquo would be desirable with compliance and systems work covered by internal audit and external audit being focused on substantive testing

The information provided by auditors to stakeholders is considered important both in terms of revisiting the audit report but also considering additional communication on audit methodology (for example explaining the extent of substantive verification of the balance sheet)

We do not believe that the market has failed to the extent which would merit such an extreme level of regulatory intervention

The importance of regular dialogue between the Audit Committee the external auditor and the internal auditor is highlighted in the Green Paper and the Commission is consulting regarding the adequacy of current dialogue and whether this could be improved

The European Commission therefore is consulting on

bull whether audit methodology should be explained better to users

bull the need for reinforcing professional scepticism

bull what (and how) additional information should be provided to external stakeholders

bull the need for more regular communication by the auditor to stakeholders and the need to shorten the gap between the year end and the audit opinion dates and

bull whether and how to reconsider the negative perception attached to qualified audit reports

Governance and the independence

of audit firms

In the context of auditor independence being the lsquounshakeable bedrockrsquo of the audit environment the Commission states that it would like to reinforce the independence of

auditors and address the conflicts of interest which it asserts are inherent in the current framework

The Commission identifies the appointment and remuneration of the auditor being made by the company being audited the low levels of audit firm rotation and audit firms providing non-audit services as potential issues

Among the possible changes identified by the Commission are

bull auditors being appointed by some form of nationalEuropean regulator rather than by shareholders

bull limiting the maximum length of an audit appointment and

bull introducing a prohibition on non-audit services either for all companies or just certain types such as systemic financial institutions or limiting the maximum level of fees that can be earned from a single client

Concentration and market

structure

The Commission highlights the market share of listed company audits held by the Big 4 and questions whether this represents lsquosystemic riskrsquo ndash with the Big 4 being ldquosystemic firmsrdquo that require particular attention



Sponsored by KPMG

It also expresses the view that entry into the top-tier section of the audit market is difficult and that the reputation of those firms auditing large listed companies helps perpetuate market concentration

The Commission is considering various ideas including

bull joint auditsaudit consortia

bull mandatory rotation and re-tendering

bull the introduction of contingency plans such as ldquoliving willsrdquo and

bull whether the recent consolidation of audit firms should be reversed

Creation of a European market

supervision and international coshy

operation

The Commission notes that there are many barriers to integration of the European audit market and that cross-border mobility of audit professionals remains low It therefore asks for views on the best way of enhancing cross-border mobility of audit professionals and whether concepts of lsquomaximum harmonisationrsquo and a lsquoEuropean passportrsquo for auditors are supported

The Green Paper notes that at present whilst supervision at a national level exists there is no coverage of cross-border management entities that cover an audit networkrsquos operations across the member states and requests views on measures that might improve the integration and coshyoperation on audit firm supervision at EU level

The Commission recognises that knowledge obtained by auditors through their work may be useful to supervisors and the desirability of improved communication between auditors and supervisors but not if this blurs responsibilities between the two parties and therefore also seeks views on how increased communication between the auditor of large listed companies and the regulator might be achieved

The KPMG View

Some of the proposals in the Green Paper lsquoAudit Policy Lessons from the Crisisrsquo are worthy of further consideration but we have a fundamental concern with the apparent lack of confidence in the ability of audit committees and or supervisory boards to exercise their stewardship role effectively This seems to be at the heart of a number of the suggestions which would restrict your ability to choose the best people for the job such as using a regulator to choose the audit firm requiring mandatory audit firm rotation requiring joint audits (or audit consortia ndash although it is less clear how this would work in practice) and prohibiting all non-audit services (potentially to the extent of creating ldquopurerdquo audit firms) Whilst there are always exceptions to good corporate governance we do not believe that the market has failed to the extent which would merit such an extreme level of regulatory intervention

We are also far from convinced that such measures will improve audit quality ndash in fact we believe they may well have the opposite effect We are also firmly of the view that having non-auditors within the same professional services firm enhances our ability to bring specialist skills and insights to our audit work It is perhaps interesting to note that in its most recent consultation on non-audit services the UK Auditing Practices Boards stated ldquoThe message from the review undertaken by the APB is that commentators (irrespective of the constituency involved) were overwhelmingly of the view that there should not be an outright prohibitionrdquo on the provision of non-audit services by the auditor

On the other hand proposals to look at the scope of the audit communication with shareholders and regulators and harmonisation of the audit market within Europe are likely to be much more fruitful areas of debate in enhancing the role and effectiveness of audits Q31

Timothy Copnell

Associate Partner Audit Committee Institute



Sponsored by KPMG

Cash and liquidity forecasts are not just

for going concern reviews



Sponsored by KPMG

Are boards seeing the right information in relation to cash and liquidity on a regular basis

It is fair to say that the volatile market and credit conditions experienced in the last 18 months have heightened the importance of and focus on cash management within organisations

Two recent KPMG surveys confirm that cash remains one of the top priorities for senior executives Our 2010 Business Leaders Barometer survey reports that 43 percent of UK senior executives consider improving cash management as one of its top three priorities Our 2010 Cash and Working Capital Management survey reports 83 percent of respondents as saying that cash is among their top five priorities

It is in all stakeholdersrsquo interests for senior executives to focus on cash but what does this mean What is good cash governance and what should boards be expecting the business to provide for their review and consideration

The Financial Reporting Council has issued guidance in recent months to assist directors of UK companies and audit committees in considering the challenges arising from the current economic conditions on going concern and liquidity risk as part of the preparation of annual financial reports

This year end process is very important The rigour that is applied in assessing and challenging the critical assumptions underlying cash flow forecasts as part of going concerns reviews should however be performed regularly throughout the year Our recent experience shows that this is not always the case There can be a lack of awareness amongst executive and non-executive directors outside of the finance function of the tools used to monitor the cash requirements of the business

Detailed cash flow information and forward looking forecasts including covenant compliance are not always a part of board reporting and are therefore not seen by all senior executives on a regular basis The information provided to boards often reflects longer-term on a monthly basis using a funds flow methodology It is important to understand the longer term cash trends of a business but the reported period-end positions are not sufficient to identify any intra-month cash flow peak requirements



Sponsored by KPMG

We have seen a number of rapid and unplanned insolvencies because businesses have not spotted short term cash issues

For those boards facing stressed or distressed situations this information is not particularly useful as businesses rarely face problems just at the month end We have seen a number of rapid and unplanned insolvencies because businesses have not spotted short term cash issues

How does a board determine whether the information it sees is sufficient Start with simple questions

bull How does the business monitor its cash position in the short term medium term and long term

bull What cash flow information is produced

bull What is their purpose who uses them and are they accurate

What should be produced

A business can produce a variety of cash flow forecasts These include

bull Treasury forecasts daily forecasts of receipts and payments with a very short forecast period to ensure sufficient funding is in place to meet anticipated business requirements

bull Short term forecasts weekly receipts and payments basis and ranging from six to 17 weeks going forward to provide greater clarity over the expected date of receipts and payments

bull Medium and or long term forecasts longer term forecasts on a monthly and funds flow basis that provide a directional indicator of cash flow rather than an accurate view of requirements

Boards need to see a combination of cash flow forecasts to understand the different business perspectives and trends All cash flow forecasts however must be prepared in a robust way and be reconcilable regardless of the basis of preparation to provide comfort that they have been prepared consistently and appropriately

If cash is not a board priority it is unlikely to be a business priority If boards are proactive in demanding and challenging information on cash performance this will force management to deliver high quality well-controlled management information in a timely manner

How should it be produced

Accurate operational cash forecasting is at the centre of strong cash governance Daily or weekly cash flow forecasting is vital for operating a business At the very least companies should prepare a rolling 13 week receipts and payments forecast This should be updated on a weekly basis with a full reforecast once a month using month-end information For this to be a robust and useful it must involve more than the finance function and include the key operational areas of the business

What should boards consider and

review

A short term cash flow forecast

is only useful if it is understood

For this to happen it is essential that the forecast is accompanied by documented assumptions and detailed commentary The commentary needs to highlight the following

bull Key forecast movements

bull Variance analysis against actual performance

bull Changes from previous forecasts and

bull Risks and opportunities that might arise in the future



Sponsored by KPMG

Actual performance should drive

improvements in forecast

accuracy

Boards need to understand and consider forecasts against actual performance When critical assumptions underlying the forecast are challenged and subject to scrutiny through variance analysis the refined forecasts have an increased level of accuracy Heightened liquidity risks may necessitate that boards pay greater attention to the key assumptions and processes that underlie the production of cash flow forecasts

Facilities available to the

company should be compared

to the companyrsquos expected

cash requirements as detailed in

the forecast

How has the board satisfied itself that expiry dates currency exchange rates guarantees indemnities or other liquidity requirements have been included in determining available facilities Proper analysis of the terms of current banking facilities and covenants should be provided to the board to help understanding

Scenario planning should be used

to consider off-plan performance

When stress testing cash flow forecasts what might have been acceptable stress tests historically are unlikely to be appropriate now or

in the foreseeable future The volatile credit and market conditions mean than many companies will need to consider a wider range of outcomes when performing sensitivity analysis

Boards should consider actual trading performance the extent of reliance on key suppliers andor customers the impact of credit insurers amending cover and refinancing Historical experience is unlikely to be a good guide to the likely success of securing a refinancing Banks continue to apply far tighter criteria when their clients refinance and the ability to refinance should not be assumed to be a straight forward exercise Boards need to ensure that appropriate evidence has been obtained about the ability to secure new or to renew funding commitments

Formal plans of potential cash

generating initiatives should

bridge any performance gap

Cash generating initiatives that are owned by operational teams should be a part of normal performance improvements measures Boards need to ensure that any performance gap is being addressed by the initiatives and these are being progressed at appropriate speeds In order to understand the impact on any performance shortfall these

measures should be reported to the board as part of cash management information on a regular basis

Communication

The means and frequency by which a board receives communication from the business on cash plays an important part in its ability to take action Good governance requires sustainable processes and practices that the business understands and can produce regularly and efficiently

Cash is a far scarcer resource than it was two years ago A board and company that has a range of robust tools to understand and manage its cash resources over a range of time horizons will be better able to control its destiny An enduring and disciplined focus on cash flow forecasting will allow boards to focus better on future cash requirements as part of their more strategic considerations Q31

Martin Flint

Senior Manager Restructuring KPMG LLP





The Financial Reporting Council has issued key questions for audit committees to help promote high quality corporate governance and reporting The first set of questions focus upon risk identification and reporting Others seek to stimulate an appropriate environment for key estimates assumptions and models produced by management to be challenged in a constructive way and for providing support for auditors carrying out their work with an appropriate degree of professional scepticism


Assessing and communicating risk and

uncertainties

bull Has the board set out in the annual report a fair review of the companyrsquos business including its principal risks and uncertainties Are the risks clearly and simply stated Are there many of them and if so are they really principal risks Is it clear how the risks might affect the company

bull Has full consideration been given to how the business may have been changed to address the effects of the recession and the additional challenges if any posed by the forecast significant reduction in government expenditure

bull Is it clear how the board is managing the risks Are the processes used to manage risks supported by systems and internal controls that are effective in achieving their objectives

bull Is the committee satisfied that the group has monitored the effects on the business of the continued volatility in the financial markets and reduced supply of credit including its exposure to liquidity risk and customer and supplier default risk

bull Has the committee considered whether the audited financial statements describe fairly all of the key judgements about the application of accounting policies and the estimation uncertainties inherent in the value of assets and liabilities

bull Have all relevant issues that have concerned management during the year and that have been drawn to the attention of the board andor the audit committee been considered for disclosure

Reliance on estimates assumptions and

forecasts

bull Has the audit committee considered the processes in place to generate forecasts of cash flow and accounting valuation information including the choice and consistent use of key assumptions

bull Are the forecasts and valuation processes supported by appropriate internal controls and reasonableness checks and have those internal controls been tested by internal andor external audit

bull Has consideration been given to the need for changes in the approach to valuations and key assumptions underlying forecasts since last year and are those changes consistent with external events and circumstances Have last yearrsquos key forecasts and valuations been compared to actual outcomes and have any lessons been fed into the current year process

bull Do models and key assumptions adequately address low probability but high impact events Has management considered which combination of scenarios could conspire to be the most challenging for the company

bull Is the audit committee satisfied that appropriate sensitivity analysis has been conducted to flex assumptions to identify how robust the model outputs are in practice and that the assumptions are free from bias

bull Where assets are not traded perhaps because markets are no longer active is the committee satisfied that appropriate additional procedures have been undertaken to estimate fair values through the selection of market based variables and the use of appropriate assumptions

bull Are the assumptions that underlie valuations including any impairment tests consistent with internal budgets and forecasts and with how the prospects for the business have been described in the narrative sections of the annual report and accounts

bull Have the auditors been asked for a written summary of their views on the assumptions that underlie cash flow forecasts and other estimation techniques used to value assets and liabilities Is the committee satisfied that any material concerns have been properly addressed by management

Assessing audit quality and creating

the right environment for constructive

challenge

bull Has the audit committee discussed the outcome of the prior year review of the effectiveness of the annual audit with the auditor and does the audit strategy and plan appropriately address the issues raised

bull Where an internal audit function exists has the committee considered whether it wishes internal audit to conduct additional work up to or at the year end For example to look at new or amended products and services Is the committee comfortable with the boundary between internal and external audit

bull Has the audit committee discussed business and financial risks with the auditor and is the committee satisfied that the auditor has properly addressed risk in their audit strategy and plan Is the committee satisfied that the external auditor has allocated sufficient additional and experienced resources to address heightened risks and if not are negotiations scheduled to secure additional commitments Has management exerted undue pressure on the level of audit fees such that it creates a risk to audit work being conducted effectively

bull Has consideration been given to any recommendations for improvement in prior year annual reports or audit from the press or regulatory agencies including the Financial Reporting Review Panel or the Audit Inspection Unit

bull Have arrangements been agreed with the auditor to ensure they express any concerns they have about estimates assumptions and forecasts without undue influence by management



For further information please visit http

wwwfrcorgukpresspub2442html

Q31


Ministry of Justice consults on its

lsquoadequate proceduresrsquo guidance



In September the Ministry of Justice (MOJ) started an eight week consultation period on its lsquoadequate proceduresrsquo guidance as required by the UK Bribery Act 2010 The consultation closed on 8 November 2010 and final guidance is expected in early 2011 in time for implementation of the Act in April 2011

As expected the Government has adopted a broad principles-based approach in the guidance based around its lsquoSix Principles for Bribery Preventionrsquo A brief overview of each is as follows

bull Risk assessment ndash the commercial organisation regularly and comprehensively assesses the nature and extent of the risks relating to bribery to which it is exposed

bull Top level commitment ndash the top level of management of a commercial organisation (be it a board of directors the owners or any other equivalent body or person) are committed to preventing bribery They establish a culture within the organisation in which bribery is never acceptable They take steps to ensure that the organisationrsquos policy to operate without bribery is clearly communicated to all levels of management the workforce and any relevant external actors

bull Due diligence ndash the commercial organisation has due diligence policies and procedures which cover all parties to a business relationship including the organisationrsquos supply chain agents and intermediaries all forms of joint venture and similar relationships and all markets in which the commercial organisation does business

bull Clear practical and accessible policies and procedures ndash the commercial organisationrsquos policies and procedures to prevent bribery being committed on its behalf are clear practical accessible and enforceable Policies and procedures take account of the roles of the whole work force from the owners or board of directors to all employees and all people and entities over which the commercial organisation has control

bull Effective implementation ndash the commercial organisation effectively implements its anti-bribery policies and procedures and ensures they are embedded throughout the organisation This process ensures that the development of policies and procedures reflects the practical business issues that an organisationrsquos management and workforce face when seeking to conduct business without bribery

bull Monitoring and review ndash the commercial organisation institutes monitoring and review mechanisms to ensure compliance with relevant policies and procedures and identifies any issues as they arise The organisation implements improvements where appropriate

The principles are not prescriptive but designed to be a lsquoflexible guidersquo to help an organisation decide lsquowhat procedures are rightrsquo based on its own business requirements

The MOJ has also published five lsquoillustrative scenariosrsquo where bribery may occur within a companyrsquos operations ndash ie involving business intermediaries facilitation payments etc ndash and a series of questions around how the companyrsquos compliance policies might respond to these situations These could be useful as a high-level exercise but it is not clear whether lsquoyesrsquo answers mean that a company likely has lsquoadequate proceduresrsquo in place and equally whether lsquonorsquo answers means they do not

Either way the guidance and scenarios should provide a company with some assistance regarding what steps they might need to take between now and April 2011 to ensure that their procedures are lsquoadequatersquo under the Act Q31

This summary was provided by Brent McDaniel

Director Forensic KPMG LLP For further information please visit httpwwwjusticegovukconsultations briberyactconsultationhtm



Sponsored by KPMG

Below are the key developments during the last quarter for IFRS and UK GAAP

Title of article Subject Effective date

IASB IFRS 9 Financial Instruments Additions to new Standard

Periods beginning on or after 1 January 2013

Financial Statement Staff Draft Not applicable

Presentation

Consolidation Staff Draft Not applicable

ASBUITF The Future of UK Financial Proposals Comments by 30 April 2011 Reporting

UK Pension changes Draft Abstract To be determined

Other matters Filing accounts with Companies A reminder Immediately House




Sponsored by KPMG

Additions to IFRS 9 Financial

Instruments

On 28 October 2010 the IASB issued a new version of IFRS 9 Financial Instruments IFRS 9 now includes guidance on the classification and measurement of financial liabilities and the derecognition of financial assets and financial liabilities

The derecognition requirements are unchanged from IAS 39 As regards liabilities there are two substantive changes from the requirements in IAS 39 ndash relating to the fair value option and to certain derivatives linked to unquoted equity instruments

The new version of IFRS 9 retains the eligibility conditions in IAS 39 for irrevocably designating at initial recognition a financial liability as measured at fair value through profit or loss However IFRS 9 now requires that the amount of change in fair value attributable to changes in the credit risk of the liability be presented in other comprehensive income The remaining amount of the total gain or loss is included in profit or loss As an exception if this requirement creates or enlarges an accounting mismatch in profit or loss then the whole fair value change is presented in profit or loss

Under IAS 39 derivative liabilities that are linked to and must be settled by delivery of an unquoted equity instrument whose fair value cannot be measured reliably are measured at cost under the new version of IFRS 9 they are measured at fair value as are the underlying instruments

The new standard is effective for annual periods beginning on or after 1 January 2013 although not endorsed for use in Europe Whilst the new standard is generally applied retrospectively there are several exceptions from this principle which are largely consistent with the previous version of IFRS 9

The IASB Press Release is available at httpwwwifrsorgNewsPress+ ReleasesIFRS9+October+10htm

Financial Statement Presentation

The IASB has recently published a Staff Draft of its tentative decisions on its financial statement presentation project

The format of all the primary statements would be affected if the proposed cohesiveness and disaggregation principles become effective ndash the financial statements would be presented very differently An entity would classify items within the primary statements by reference to its activities and functions principally within operating investing and financing categories ndash although within those categories the choice between presentation of assets and liabilities on a short and long term basis or in order of liquidity is retained

Users of financial statements may find that the additional disaggregation of information facilitates improved analysis and insight into an entityrsquos financial position and performance However preparers may encounter costs and systems challenges in presenting financial statements on the proposed basis and may be concerned that excessive disclosure obscures important information As the classification of sections and categories is mainly dependent on the individual activities of the entity there may also be some sacrifice of comparability between entities

Details of the IASB Project can be found at httpwwwifrsorgCurrent+ ProjectsIASB+ProjectsFinancial+ Statement+PresentationFinancial+ Statement+Presentationhtm

Consolidation

The IASB has released a staff draft of a forthcoming IFRS on consolidation that would replace IAS 27 Consolidated and Separate Financial Statements and SIC 12 Consolidation ndash Special Purpose Entities

The objective of the consolidation project is to issue a single IFRS for consolidation providing a modified definition of control and related application guidance that can be

applied to all entities this is the staff draft document A separate IFRS requiring enhanced disclosures about consolidated and unconsolidated entities will be issued as well as an exposure draft on investment companies

The staff draft which is for information only and subject to change introduces a new control model for determining whether an investor controls and therefore should consolidate an investee This model would apply to all investees

An investor controls an investee when it is exposed or has rights to variable returns from its involvement with that investee and has the ability to affect those returns through its power over that investee

The control model focuses on whether rights held by the investor and others are substantive whether control should be assessed primarily by focusing on voting and potential voting rights or by focusing on other contractual rights and specifies that the model includes de facto control

Details of the IASB Project can be found at httpwwwifrsorg Current+ProjectsIASB+Projects ConsolidationConsolidationhtm

The Future of UK Financial

Reporting

The ASB has published its proposals for the future of financial reporting in the UK using a three-tier reporting framework based on public accountability The ASB is proposing these changes because it recognises that the current Financial Reporting Standards now lack cohesive principles as a consequence of developments in financial reporting in recent years

Tier 1 would consist of entities with public accountability these entities would be required to report under IFRS as adopted by the EU This includes quoted groups companies with debt traded on public markets and companies that hold deposits or manage as one of their primary businesses money for a broad group of outsiders (such as pension

It should be noted that the IASB has deferred further consideration until after June 2011



Sponsored by KPMG

schemes building societies insurance entities and banks)

Tier 3 would deal with small entities (as defined in the Companies Act) without public accountability These companies would continue to use the simplified version of UK standards (the FRSSE)

Those in between ndash tier 2 ndash would report under a new standard based on the IFRS for SMEs the Financial Reporting Standard for Medium-sized Entities (FRSME) The FRSME would amend the IFRS for SMEs to comply with UK law and based on responses to earlier consultations the ASB proposes to align the FRSMErsquos requirements for tax with those within IAS 12 Income Tax instead of those within the IFRS for SMEs

The ASB believes a consistent framework should make interpretation simpler for users of accounts that companies will find it easier to move between tiers and that its proposed reduced disclosure regime would enable most group subsidiaries to make significant savings

The ASB proposes disclosure exemptions for qualifying non-publicly accountable subsidiaries applying either EU-IFRS or the FRSME

In response to feedback during previous consultations the ASB says it plans to develop a supplementary standard tailored to the needs of public benefit entities such as charities The sector-specific statements of recommended practice (SORPs) would be retained where the ASB believes there is a clear need

The ASBrsquos consultation period will run until 30 April 2011

The ASB Press Release is available at httpwwwfrcorgukasbpress pub2414html

Accounting Implications of the

Replacement of the Retail Price

Index with the Consumer Price

Index for Retirement Benefits

On 8 July 2010 the government announced that the Consumer Prices Index (CPI) should replace the Retail Prices Index (RPI) as the inflation

measure for private sector defined benefit pension schemes to use in determining the minimum pension increases which must be applied to the statutory index-linked features of pensions in payment and deferred pensions It had made a similar announcement in June 2010 for public sector schemes

The UITF was asked to provide guidance on the accounting treatment required by FRS 17 Retirement Benefits for this change The draft Abstract considers both where to recognise any changes and when to recognise those changes

Recognition of the change (ie lsquowherersquo) is dependent on whether there is an obligation to pay pensions with increases based on RPI or more generally with inflation-linked increases The obligation can be legal or constructive

bull Where the scheme liabilities are based on RPI the draft states ndash perhaps somewhat surprisingly as regards a constructive obligation ndash that any change to these liabilities will generally require the agreement of the retirement benefit scheme trustees andor the members of the scheme Where there is a change in the obligation to the member there is a change in benefit that gives rise to a past service cost in accordance with FRS 17 This is recognised in profit or loss

bull If there is no legal or constructive obligation to pay RPI then the change to CPI is a change in the assumption about inflation used to measure the liabilities This is an actuarial gain or loss recognised in the statement of recognised gains and losses in accordance with FRS 17

The timing of recognition (ie lsquowhenrsquo) is dependent in part on the answer to the lsquowherersquo question

bull Any past service cost should be recognised in the accounting period when any necessary consultations have been concluded

bull If the change to CPI is a change in assumptions paragraph 23 of FRS 17 requires the use of assumptions that reflect market expectations at the balance sheet date The market expectations for a change occurred in the period in which the governmentrsquos announcement was made

The final Abstract is expected imminently

The UITF press release is available at httpwwwfrcorgukasbuitf pub2392html

Filing accounts with Companies

House

Companies House is currently experiencing a high rejection rate for annual accounts (over 10 percent in the first half of 2010) and has published its most common rejection reasons These include

bull Reference to the old Companies Act in accounts The 2006 Act applies to private limited companies for accounting periods beginning on or after 6 April 2008 and 1 October 2008 for LLPs

bull Duplicate accounts being received (if a company is filing revised or amended accounts they should be marked up as such)

bull Signatory name missing off balance sheet andor balance sheet signature omitted

bull Accounts made up to the incorrect reference datedates are absent

bull 2006 Act audit exemption statements missing or incorrect

The Companies House press release can be found at httpwwwcompanieshouse govukaboutpdf commonAccountsRejectionspdf Q31


ACI Events in 2011

We will be running a number of industry and sector specific events in addition to our technical update series and FTSE 350 breakfast programme If you require further information please contact

Nicola Collins


The ACI launches the Public Sector Programme

Are you a board member in an NHS Trust or Housing Association an elected member at a Local Authority a Governor at an FE College or a Council member of a University In 2011 you will be seeking the same level of assurance probably greater than you do now but it is likely that you will be seeking this from officers who have less resource to deliver it with This programme running in the Winter and Autumn across five geographical regions will help you to navigate the difficult times ahead For further information please contact Nicola Collins

Contact us

If you have feedback on this issue or would like to suggest a topic for a future edition please contact

Nicola Collins

Tel 020 7694 8226 e-Mail nicolacollinskpmgcouk

wwwkpmgcoukaci

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity Although we endeavour to provide accurate and timely information there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future No one should act on such information without appropriate professional advice after a thorough examination of the particular situation

copy 2010 KPMG LLP a UK limited liability partnership is a subsidiary of KPMG Europe LLP and a member fi rm of the KPMG network of independent member fi rms affi liated with KPMG International Cooperative a Swiss entity All rights reserved Printed in the United Kingdom

The KPMG name logo and ldquocutting through complexityrdquo are registered trademarks or trademarks of KPMG International

KPMG LLP (UK)rsquos Design Services | RRD-239100 | December 2010 | Printed on recycled material


Sponsored by KPMG

About the Audit Committee Institute Recognising the importance of audit committees the Audit Committee Institute (ACI) has been created to serve audit committee members and help them to adapt to their changing role Sponsored by KPMG the ACI provides knowledge to audit committee members and is a resource to which they can turn for information or to share knowledge

For more information on the work of the ACI please click on our web site wwwkpmgcoukkpmgaci

or contact

Timothy Copnell

Associate Partner Audit Committee Institute KPMG LLP (UK) 15 Canada Square London E14 5GL




Sponsored by KPMG 3

Contents

Introduction 4









Sponsored by KPMG 4

Introduction



Sponsored by KPMG







Oliver Tant




Sponsored by KPMG



Sponsored by KPMG 7






Sponsored by KPMG





committee meetings



























Sponsored by KPMG






departments




critical alignments









of the NACD











Sponsored by KPMG









Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG 3

Contents

Introduction 4









Sponsored by KPMG 4

Introduction



Sponsored by KPMG







Oliver Tant




Sponsored by KPMG



Sponsored by KPMG 7






Sponsored by KPMG





committee meetings



























Sponsored by KPMG






departments




critical alignments









of the NACD











Sponsored by KPMG









Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG 4

Introduction



Sponsored by KPMG







Oliver Tant




Sponsored by KPMG



Sponsored by KPMG 7






Sponsored by KPMG





committee meetings



























Sponsored by KPMG






departments




critical alignments









of the NACD











Sponsored by KPMG









Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG







Oliver Tant




Sponsored by KPMG



Sponsored by KPMG 7






Sponsored by KPMG





committee meetings



























Sponsored by KPMG






departments




critical alignments









of the NACD











Sponsored by KPMG









Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG



Sponsored by KPMG 7






Sponsored by KPMG





committee meetings



























Sponsored by KPMG






departments




critical alignments









of the NACD











Sponsored by KPMG









Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG 7






Sponsored by KPMG





committee meetings



























Sponsored by KPMG






departments




critical alignments









of the NACD











Sponsored by KPMG









Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG





committee meetings



























Sponsored by KPMG






departments




critical alignments









of the NACD











Sponsored by KPMG









Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG






departments




critical alignments









of the NACD











Sponsored by KPMG









Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci











Sponsored by KPMG









Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG

Role of the auditor













of audit firms









structure




Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG









operation




The KPMG View




Timothy Copnell




Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG





Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG










Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG

















review










Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG



accuracy






the forecast












Communication



Martin Flint









uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci











uncertainties








forecasts











challenge










Q31





















Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci
























Sponsored by KPMG






Presentation








Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG


Instruments












Consolidation









Reporting






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci






Sponsored by KPMG

























House









ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci





ACI Events in 2011


Nicola Collins




Contact us


Nicola Collins


wwwkpmgcoukaci





239100 aci quarterly 31 web - kpmg...8 audit committee institute sponsored by kpmg 1. be proactive...

Documents