Building Trust through Agreed-Upon Procedures

Bodo Richardt, Paul Thompson | March 13, 2017

We live in a time when there is an increasing deficit of trust—in government, in the media, in business, in markets. The Edelman 2017 Trust Barometer provides ample evidence of the scale and significance of this deficit. Accountants, as providers of services that build credibility and trust, primarily in published financial information, therefore have a great opportunity.

What services can accountants offer that can play some part, a significant part, in building trust in business?

To help identify innovative new ways of building credibility and trust, especially in business and markets—beyond the financial, and beyond assurance—the International Auditing and Assurance Standards Board (IAASB) released the Discussion Paper (DP), Exploring the Demand for Agreed-Upon Procedures Engagements and Other Services, and the Implications for the IAASB’s International Standards last November (the deadline for responses is March 29, 2017).

The European Federation of Accountants and Auditors for Small- and Medium-sized Entities (EFAA) is highly supportive of this project as it sees much potential for growth in these types of engagements, engagements that stand to offer real value to small- and medium-sized entities (SMEs). The challenge will be to ensure that any revised or new standards and/or guidance is principles based, scalable, and leaves room for innovation.

This consultation is central to the IAASB’s current work plan, which recognizes the importance of addressing the concerns of small- and medium-sized practices (SMPs), including considering how auditing standards can be effectively applied to audits of SMEs, and standards to support other services provided by SMPs. Of course, SMPs increasingly provide advisory services, which help drive business performance and can foster trust.

Let’s be clear: this is a win-win. A win for the profession, especially accountants in practice, as it builds demand for its services and expertise, and a win for business, society, and the public interest, all of which gain from greater trust. The right engagement standard could help accounting firms greatly expand their offerings known as agreed-upon procedures (AUP). Indeed the IFAC SMP Committee issued a brochure last year that clearly and concisely explains, in layman’s terms, the various offerings from audit through to AUPs. In addition, a committee member previously explained the value of SMPs growing their practice off the back of AUPs.

What is an AUP?

International Standard on Related Services (ISRS) 4400, Engagements to Perform Agreed-upon Procedures Regarding Financial Information establishes requirements and provides guidance for performing an AUP engagement. Under ISRS 4400, an AUP engagement involves a practitioner performing procedures that have been agreed to by the practitioner, the entity, and any appropriate third parties, and then reporting on the factual findings based on the procedures performed.

In conducting an AUP engagement in accordance with ISRS 4400, the practitioner does not express an opinion. Users of the AUP report assess for themselves the factual findings based on the procedures performed and draw their own conclusions. Appendix A of the Discussion Paper, reproduced below, provides some examples of subject matter information on which AUP engagements may be performed. 

AUP Engagements Where the Subject Matter Information Is Financial Information

 AUP Engagements Where the Subject Matter Information Is Non-Financial Information

Report on eligibility of expenditures claimed from a funding program

Report on the operation of internal controls over financial reporting

Report on revenues (e.g., for determining royalties, rent, franchise fees based on a % of revenues)

Report on compliance with “green packaging” requirements

Reconciliation between different financial reporting frameworks

Report on number of passengers to a civil aviation authority

Report on compliance with bank covenants

Report on greenhouse gas emissions

Report on capital adequacy ratio for regulatory authorities

Report on observation of destruction of fake or defective goods

Calculations of financial ratios of projected cash flows for reporting to tax authorities

Report on data generating processes for national lottery draws

We suspect that with the right standard, allied with greater awareness and understanding by accountants, entities, and third parties as to how AUPs might be conducted on wider range of subject matters, the market for such services could greatly increase.

How can you help the IAASB?

For the IAASB to be able to develop the right standard, or perhaps simply clarify and improve the existing one, and, thereby allow SMPs and SMEs to realize the potential of AUPs, it is vital that accounting practices, professional accountancy organizations, and especially SMPs and SMEs, respond. Throughout the Discussion Paper, questions that are repeated and presented together on page 22. We strongly encourage you to respond.

We’d also like you to share your views on some of the key issues in the comments below. These comments will prove especially useful to the IAASB, which often fails to hear directly from SMPs and SMEs. Set out below are some of the key issues and EFAA’s preliminary position, if any. These positions may change as we discuss and explore the issues further and hear the views of readers and others.

Q1. The Role of Professional Judgment and Professional Skepticism in an AUP Engagement

Do you agree that professional judgment has a role in an AUP engagement, particularly in the context of performing the engagement with professional competence and due care, but that the procedures in an AUP engagement should result in objectively verifiable factual findings?

We agree.

Q2. The Independence of the Professional Accountant

Should the practitioner conducting AUP engagements be independent?

We disagree. SMEs typically place their trust in the competence and integrity of SMPs. We also refer to our understanding that AUP engagements should result in objectively verifiable factual findings. The appearance of independence is not especially important in the context of SMPs providing AUP to SMEs.

Q3. AUP Engagements on Non-Financial Information

Should the scope of ISRS 4400 include non-financial information?

Yes. Increasingly it is non-financial information that stakeholders seek to help them determine businesses’ performance and prospects as well as how well they are governed and manage risk.

Q4. Format of the AUP Report

Do you agree that an illustrative AUP report that presents the procedures and corresponding findings in a tabular format, or one that presents each procedure and corresponding finding together, will facilitate better communication than the existing illustrative report (which simple lists procedures followed by findings)?

We agree.

Q5. AUP Report Restrictions – To Whom the AUP Report Should be Restricted

Q6. Do you agree that the AUP report can be provided to a party that is not a signatory to the engagement letter so long as the party has a clear understanding of the AUP and the conditions of the engagement?

We agree.

Q6. Recommendations Made in Conjunction with AUP Engagements

Do you agree that recommendations should be clearly distinguished from the procedures and factual findings?

We agree.

Bodo Richardt

President, European Federation of Accountants and Auditors for SMEs

Bodo Richardt is the President of the European Federation of Accountants and Auditors for SMEs (EFAA) and has been an accountant for over 30 years.  He has worked in a variety of professional practices including practices of sizes ranging from the Big 4 to SMPs, working in his native Germany, France and the United States.  He has experienced and enjoyed working on international and national standard setting boards including the International Auditing and Assurance Standards Board (IAASB) and the Institute of Public Auditors in Germany (IDW).  He has also had the possibility to serve the auditing profession as Bavarian President and a member of the Wirtschaftsprüferkammer Advisory Board.  He currently works as a self-employed practitioner (SMP) to SMEs and family owned businesses where he specialises in the provision of expert opinions on audit and accounting related questions, business valuations, mediation and arbitration. See more by Bodo Richardt

Paul Thompson

Director, European Federation of Accountants and Auditors for SMEs

Paul Thompson is EFAA Director and a consultant dedicated to thought leadership and development of the global accountancy profession. From 2004 to 2016 Mr. Thompson worked for IFAC latterly as Director, Global Accountancy Profession Support, a role that extended to overseeing the IFAC Global Knowledge Gateway, research and innovation, and activities in support of small- and medium-sized practices (SMP) and professional accountants in business (PAIB). Mr. Thompson also serves on the SME Implementation Group, an advisory body to the International Accounting Standard Board (Board), and is a member of Nottingham University Business School Malaysia’s Industry Advisory Board (IAB), an advisory group providing strategic advice to the Business School. He advises developing professional accountancy organisations in Europe and Asia. Previously Mr. Thompson worked for Touche Ross & Co., London before going on to lecture on corporate reporting and analysis at universities in the UK, Singapore, and Malaysia. He has a number of publications in academic journals and the professional press in the areas of ethical finance, corporate reporting, corporate governance, integrated reporting, practice management and the future of the profession. Mr. Thompson graduated from the University of Warwick with a bachelor of science in accounting and financial analysis and is a fellow of the Institute of Chartered Accountants in England and Wales. Mr. Thompson is an internationally ranked masters distance runner. See more by Paul Thompson

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