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Saint Petersburg, July 13, 2017

AUDIT OVERSIGHT – THE PORTUGUESE EXPERIE NCE. Fernando Teixeira Pinto, CMVM, Portugal. Saint Petersburg, July 13, 2017. I . THE AUDIT SOCIETY. THE AUDIT SOCIETY. Some authors talk about the “audit society”, the “audit explosion”, etc In fact, several kinds of audit have appeared:.

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Saint Petersburg, July 13, 2017

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  1. AUDIT OVERSIGHT – THE PORTUGUESE EXPERIENCE Fernando Teixeira Pinto, CMVM, Portugal Saint Petersburg, July 13, 2017

  2. I. THE AUDIT SOCIETY

  3. THE AUDIT SOCIETY Some authors talk about the “audit society”, the “audit explosion”, etc In fact, several kinds of audit have appeared: Since 1985… The common concept of “audit”

  4. THE AUDIT SOCIETY • REASONS • Theideasofaccountability • Thequality management systemsandTQM • Thenewpublic managementandtheideaofvalue for moneyaudit

  5. THE AUDIT SOCIETY • EFFECTS • There are more and more auditablepeople, subject to some kindofaudit • Auditingisaninstrumentofmonitorizationandsocial control • Thediffusionoftheideaofaudittransmitstheideaofcontrolreinforcement

  6. CRITICS OF TRADITIONAL FINANCIAL AUDITING • LehmanBrothershadan“unqualifiedopinion” fromE&Y onthefollowing dates: • Financial statementsof 2017: on28/01/2008 • Financial statementsofthe 1st quarterof2008: on10/07/2008 but… • Wentbankrupt: on14/09/2008 !

  7. CRITICS OF TRADITIONAL FINANCIAL AUDITING • Whatisthevaluecreatedby financial auditing? Several financial entitiesneededsupportfromtheGovernmentshortlyafterhavingreceivedunqualifiedauditor’sopinion… • Theresponsibilityofaccounting rules (v.g., how to valuetheassetsofbanks) Financial statements Financial auditing Accounting principles

  8. CRITICS OF TRADITIONAL FINANCIAL AUDITING • The“feedependency” ofauditors • The“non-auditservices” andtheauditors’ Independence / theriskof self-revision • Thefearofauditors to creatpanic in themarket

  9. CRITICS OF TRADITIONAL FINANCIAL AUDITING • Thetraditionalauditreports: • What do theymean to theseveralstakeholders? • Theyallseem to bevery similar • Shouldtherebeotherkindsofreports? • Financial auditingisonly a partofthe global frameworkof financial report; there are otherrelevantaspects, besidesauditing: corporategovernance, risk management, internalcontrol, internalauditing, etc.

  10. CRITICS OF TRADITIONAL FINANCIAL AUDITING • Traditionalauditinghas a biggap of time: the outputs (reports) occurlongafterthefactshappened, withmuchdelay; • Theworldchanged … andauditing? Examples:: • Wechangedfrom a tangible to a more intangiblesociety • ThedevelopmentandsofisticationofIT • Complex financial instruments (ex: derivatives, etc)

  11. CRITICS OF TRADITIONAL FINANCIAL AUDITING • Theunder-utilizationofthe potencial ofIT in auditing: thereis a huge potencial in financial auditing; • Stagesoftherelationshipbetween IT andauditing: • around> “black box” • through>withthe use of CAATS • with>sincethebeginningofthe years1990 Will this be the future of auditing? Using IT in all its potencial?

  12. FINANCIAL AUDITIND AND IT • Potencial developments in therelationship financial auditing / IT • continuousauditing • data analytics

  13. THE EU AUDIT REFORM II. THE AUDIT REFORM IN THE EU AND IN PORTUGAL

  14. “Green Book” of the EC (2010): “Audit policy: the lessons from the crisis” THE EU AUDIT REFORM Issues raised: • The auditor’s role • Governance and the independence of the audit firms • Oversight: totally independent from the profession (no self-regulation) • Concentration and the structure of the audit market • The creation of the european market • International cooperation USA: sincetheSoX (2002)

  15. THE EU AUDIT REFORM The EU legislationabouttheauditreform DIRECTIVE2014/56/EU REGULATION (EU) 537/2014

  16. THE EU AUDIT REFORM Portugal hasbeenthe 2nd country to transpose LEI Nº 140/2015, de 9 de Setembro ESTATUTO DA ORDEM DOS REVISORES OFICIAIS DE CONTAS (EOROC) LEI Nº 148/2015, de 9 de Setembro REGIME JURÍDICO DE SUPERVISÃO DE AUDITORIA (RJSA) Competentnationalauthority: CMVM (Portugal) Entry in force: 2016/01/01

  17. III. THE NEW AUDIT REGIME IN PORTUGAL

  18. THE PORTUGUESE AUDIT MARKET (2016) • Turnover ofauditfirms: about 300 M€ • Nrofentitiessubject to statutoryaudit: 31,151 • PIE: 1,108 • PIE Auditors: 60 • Auditfirms: 220 Individual Auditors: 399

  19. Strategicobjectivesof CMVM as audit supervisor 2016 / 2018

  20. OUR MISSION O desígnio do DSA da CMVM is, through audit oversight, to promote audit quality, mainly in the case of PIE (public interest entities), allowing the public confidence in the audit profession (and, therefore, in their financial statements), thus contributing to the confidence of investors and the economic and social development of our country.

  21. AUDIT QUALITY: whatisit ? Thecomplywiththeprofessional standards (namely ISA) andthelawsandregulations Theauditreportsare adequate

  22. Our ACTIVITIES The most relevant activity Carried out exclusively by CMVM Object: PIE auditors (either on PIE files or non-PIE files) Nº EIP: 1,108 Nº de auditores de EIP: 60 Risk model to select auditors and audit files Cycles: 3 or 6 years PIE: publicinterestentities

  23. Our ACTIVITIES CMVM analyses the Quality Control process carried out by the Chamber of Auditors and presents requalifications and recommendations, when needed.

  24. Our ACTIVITIES Inspections based on complaints received or informations from diferente sources (media, other departments, etc.)

  25. Our ACTIVITIES • Registration of auditors • Fit and proper assessment of auditors • Analysis of non-audit services • Preparation of FAQ and regulations • Evaluation of information received from auditors by extranet: • list of PIE audited by auditor etc • Information about going-concern, qualifications, etc. • Transparency reports • Information to calculate auditors fees

  26. OTHER ISSUES • We started by establishing procedures • To design a risk model for planned oversight • The rotation of auditors • Fit and proper assessment • Non-audit services: • Limits • Forbidden • The approval by the supervisory body • Audit committees / supervisory bodies • Recommendations • Sanctions > in the 2 first years: to adopt a more pedagogical attitude

  27. OurInspections Our inspections have usually 2 components: The Risk Model Review of the internal control quality system of the audit firm Review of individual audits of PIE Auditors (either PIE or non-PIEs) Risk áreas in each audit file

  28. The INTERNAL QUALITY CONTROL SYSTEM ofauditors Standards: • ISCQ 1 • ISA 220 OBJECTIVES OF IQCS OF AUDITORS COMPONENTS To complywiththestandardsandthelawsandregulations Thereportsshoukdbeadequated Leadership (“tone at the top”) Ethics and independence Acceptance and continuance of clients relationships Human resources Engagement performance Monitoring IQCS: internal quality control system

  29. O CONTROLO DE QUALIDADE INTERNO DOS AUDITORES 1. LEADERSHIP Culture of quality

  30. Therevisionofaudit files • Thedefinitionofrisk áreas • ThecompliancewithISA’s (International Standards onAuditing)

  31. Theconsequencesofinspections • The“findings” • Thepreliminaryreport • Theauditor’scomments • Thefinal report

  32. Theconsequencesofinspections • Recommendations • Weinformourrecommendations in the final report (related to thefindings) • Wesuggest a root cause analysisbythe auditor • Actionplanto overcomeauditdeficiencies in a given date • Follow-up • Sanctions

  33. TheAuditQualityIndicators(AQI) “What we cannot measure we cannot manage” • Auditqualityfactors • Inputs • Process • Outputs • Interactionsinsidethe financial reportchain • Context • Corporategovernance • Regulatorysystem Source: IFAC

  34. To finish … thegreatOBJECTIVE of CMVMas AUDIT SUPERVISOR is: To promote the permanent improvement of AUDIT QUALITY

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