The Institute of Chartered Accountants of Belize

IMPLEMENTATION

Background

In 1998, the Institute of Chartered Accountants of the Caribbean (ICAC), the umbrella body of the Institutes of Chartered Accountants of the respective Caribbean territories commissioned its technical arm, the Auditing & Accounting Committee of ICAB to conduct a survey amongst the territorial institutes to ascertain their views on the desirability and form of a proposed Peer Review System. ICAC’s primary reason for making this request was to continue its thrust to harmonise accounting and auditing standards across the Caribbean.

IMPLEMENTATION

Background

In 1998, the Institute of Chartered Accountants of the Caribbean (ICAC), the umbrella body of the Institutes of Chartered Accountants of the respective Caribbean territories commissioned its technical arm, the Auditing & Accounting Committee of ICAB to conduct a survey amongst the territorial institutes to ascertain their views on the desirability and form of a proposed Peer Review System. ICAC’s primary reason for making this request was to continue its thrust to harmonise accounting and auditing standards across the Caribbean.

This harmonization effort represented ICAC’s response to the charges made by major financial institutions, e.g., IDB, that the application of accounting and auditing standards in the Caribbean was poor and that there was no uniformity in their application. It was felt that this disparity in the accounting standards applied and the quality of audits performed could lead to “shocks” in the financial markets if financial statement users were to make erroneous financial decisions based on inaccurate information contained in the financial statements.

What is Peer Review?

Prior to submission of the questionnaires to the territorial institutes, and in an effort to gain further insight into the issues surrounding the implementation of a peer review programme, members of the Technical Committee met with Mr.. Sha Ali Khan, Compliance Manager of ACCA, the body responsible for monitoring the peer review programme in the UK. The following paragraphs represent a synopsis of the salient features of the Peer Review System as practiced in the UK.

Mr Khan noted that one of the key features of a peer review system was regulation and he defined regulation as comprising registration, rule setting, review (or monitoring) and regulatory action.

Registration

A key feature of registration is establishing a public register of firms which are authorised to conduct audit work in the territories. The register will need to be updated regularly to add newly registered firms, delete firms ceasing to be registered and to reflect any changes of details of firms already registered. This registration process must be accompanied by a framework for the issue and removal of licences (or practicing certificates) only to persons who are fit and proper and properly qualified.

Currently, the registration issue in the Caribbean is addressed by the requirement that members be registered with the institutes to obtain their practicing certificates. In most territories, there is distinction between a practicing member and an ordinary member. This distinction is however not made in St. Lucia.
Issues

Some territorial institutes like St. Lucia have reported that their institutes do not maintain a list of members and do not have the power to enforce standards. The survey did not solicit responses from Antigua, Montserrat and St. Vincent. However, we know that legislation is in the process of being finalized for the formation of the OECS Institute which will be the umbrella body for territories comprising St. Lucia, St. Kitts, Antigua, Montserrat and St. Vincent. When the OECS Institute is constituted, the Peer Review system will have to be extended to cover practicing members in Antigua, Montserrat and St. Lucia and the Caribbean register will have to be updated accordingly.

Rule Setting

There must be a clear set of rules for registered auditors to promote public confidence and regulate the quality of work. Such rules encompass:

1. The requirement for professional indemnity insurance,

2. The acceptance of international auditing standards by members,

3. The establishment of a Code of Ethics,

4. The requirement for continuing professional education and,

5. Minimum professional qualification standards.

In the UK, the ACCA’s Monitoring Unit reports ultimately to the UK Department of Trade & Industry. The Monitoring Unit is the body charged with the responsibility of regulating the peer review practice. In that capacity it determines the criteria for the issuance of practicing licenses and who, when and the frequency of the peer review audit requirements. Some 4,500 auditors are registered with the Monitoring Unit, audits are conducted on a 5 year cycle with early follow up visits where unsatisfactory results are noted and high risk firms are visited more frequently.

ISSUES

The Bye-Laws which govern the practices of the Territorial Institutes do not currently address all of these issues. There is therefore a need to harmonise these rule setting standards in the respective institutes.

Small practicing members have either reported extreme difficulty in securing the necessary indemnity insurance or securing it at high cost. ICAC might therefore have to assume the responsibility of becoming the negotiating body for securing the indemnity insurance for these members.

Monitoring

This is the heart of the Peer Review Process. It is the process where firms are monitored (by he ICAC Monitoring Team) to ensure rules are adhered to and standards of work maintained. Monitoring will involve visiting firms and verifying that they have complied with rules and standards. Monitoring rules will have to be devised which address issues such as:

· Will the review process examine compliance with rules relating to accounting and practice management?

· Are the resources adequate and are the individuals concerned committed?

· Who will be responsible for planning and determining which firms are to be reviewed, how often and when?

· How will reviewers be properly trained?

· How will the review procedures be developed and what will be included?

· What reports will be issued and to whom will they be addressed?

· How will reviews be evaluated and graded?

· What encouragement will be given to firms to rectify deficiencies?

· What quality controls will be put in place to ensure the integrity of the results of reviews?

In the ACCA environment, in the first instance, where breaches of rules or non compliance with standards are not considered to be very serious, the monitoring visit provides advice and guidance to firms as to how the deficiencies can be rectified. Where breaches of rules or non compliance with standards is serious and/or repeated, regulatory action will need to be taken.

Issues

The Big 5 firms have taken the view that their operations are already subject to monitoring in the form of international inter-office reviews and that the ICAC Peer review System would be superfluous and an additional cost. ICAC’s response in dealing with this concern should be to suggest that in the event that the Big 5 firms are covered by the peer review system, that their inter-office review systems be compliance tested and if found to be in good order, then no detailed reviews of working papers be performed.

BENEFITS

The ACCA Monitoring Unit has reported that the smaller firms in the UK have benefited from the Peer Review Process in that it has allowed them to identify those areas of their practice which were deficient as well as provide them with the corrective action to be taken.

Regulatory Action

This particular component of audit regulation has been identified as the one which will potentially require major changes/improvements by the Territorial Institutes before implementing the Peer Review System. Inherent in the regulatory process is the understanding that for any system of regulation to be effective, action needs to be taken where deficiencies are found to be significant or pervasive.

Unlike the ACCA which has developed its own finely tuned approach to regulation whereby there is a committee system which is Human Rights compliant and applies an approach to repeated failures known as “3 strikes” which is firm but fair, the Bye-laws of the Territorial institutes do not currently embody such regulatory provisions.

The Bye-laws of these institutes need to be amended to provide specific guidelines as to the regulatory powers that the institutes should posses and the detailed processes to be observed in the actual regulation of members. In particular, all efforts must be made to ensure that the regulatory rules in the respective territories are harmonized so that a “level playing field” is established.

Quality Control Issues

Mr. Khan alluded to the following quality control issues as being key components of the peer review process:

· Staff qualification and training

· Clearly developed methodology including programmes, checklists and procedures

· Review of all work by another compliance officer

· All reports recommending regulatory action undergo second review by manager

· All compliance officers occasionally accompanied on visits by a manager.

Peer Review vs Dedicated Team

The peer review process can be conducted via 2 media, peer review or dedicated team. Under the peer review approach members perform reviews of the work of each other. With a dedicated team system, a team of individuals perform all of the review. The issues in selecting an approach are as follows:

· Availability and quality of resources

· Training of reviewers

· Consistency and quality control

· Confidentiality and conflicts of interest

Evidently, with the dedicated team approach to the peer review process, the above noted issues are better addressed.

FEEDBACK FROM TERRITORIAL INSTITUTES

In executing the mandate set it by ICAC, the Technical Committee sent out circulars to the 8 territorial institutes (Barbados, Trinidad, Guyana, Belize, Jamaica, St. Kitts, St. Lucia and Bahamas) soliciting their views on the constitution of an effective peer review system.

These territories provided information as to the number of practicing members and firms, the CPE requirements, the auditing and accounting standards adopted in the region and the requirements for CPE. There was consensus among the territories that the dedicated team approach to peer review was the preferred option and that such reviews should be conducted on a 3 year cycle.

PROPOSAL RECEIVED FROM ACCA MONITORING UNIT

The 2nd step in the development of a peer review model occurred in January 2000, when ICAC invited the ACCA’s Monitoring Unit, (the body charged with the responsibility of regulating the peer review practice in the UK), to submit a formal proposal identifying ways in which the Unit could assist ICAC in developing a quality assurance review programme.

The 1st draft of such a proposal was received in February 2001 and copies distributed to the ICAC Board Members . The draft proposal is based on information provided by the Committee to the Monitoring Unit regarding the number of firms in the 8 territorial institutes, the existing framework in each territory and the application of international accounting and auditing standards in the region.

The proposal assumes that the system of regulation will involve establishing a dedicated monitoring unit comprising compliance officers employed by ICAC to carry out the monitoring activity which is a central component of the regulatory system.. The proposal is in draft form in that it does not contain any information as to costs, as further information had to be provided to Mr. Khan on the number of practicing members in Bahamas. That information has been subsequently been provided to Mr. Khan.

The proposal indicates that ACCA would assist ICAC in developing the methodology, setting up a register, establishing a set of rules, training the ICAC Monitoring Unit and developing the regulatory framework. As noted earlier, an estimate of the cost of the proposal was not provided by ACCA as more information is required.

WHAT NEEDS TO BE DONE NOW

To take the Peer Review Process to its conclusion ICAC needs to do the following:

1. Receive from the territorial institutes their master file of membership data to compile the Caribbean register.

2. Review the Bye-Laws of the respective institutes and where necessary ensure that the required amendments are made to give the institutes regulatory powers over their members.

3. Harmonise the CPE requirements in the respective territories.

4. Act as the coordinating agency in trying to secure indemnity insurance coverage for the smaller members.

5. Meet formally with Mr. Khan to discuss and resolve those outstanding issues which are required to inform the cost estimate.

We are almost there. All that is now required is a concerted effort by ICAC’s Executive to address the above issues in a succinct form and above all have detailed discussions with Mr. Khan towards finalising the proposal.

Michael Edghill
Chairman, Technical Committee of ICAC