and Money Laundering Update 2019 Presented by John Selwood - - PowerPoint PPT Presentation

Practice Assurance and Money Laundering Update 2019

Presented by John Selwood

Redcentric PLC Findings

Planning failures

• Not assessed as

higher risk

• Superficial preliminary

AR

• ‘Fraud in the financial

statements is unlikely due to the competence

• f the finance team’

Redcentric PLC Findings

Fieldwork failures

• Cash balances
• Revenue and

debtors

• Expenses and

creditors

Redcentric PLC Findings

Highlights

ICAEW & ACCA overview ICAEW Practice Assurance report New AML rules and refresher Compilation hot topic – going concern FRC Cases & QAD Audit monitoring report International Education Standards

Professional discipline - QAD & ACCA

ICAEW

• Engagement in public practice without holding a

practicing certificate

• Fraud/dishonesty
• Preparation and filing of financial statements including

material errors

• Failure to follow the required approach regarding

professional clearance

• Non-compliance with auditing standards
• Failure to comply with the due diligence requirements of

the AML regime.

• Negligent tax advice
• Failure to comply with requirements in respect of client

monies regulations

ACCA

• 1. Know the boundaries of your comfort

zone

• 2. Use letters of engagement to avoid

scope creep

• 3. Look for scale
• 4. Don’t cut corners
• 5. Coach and delegate effectively
• 6. See the positives in practice/quality

assurance procedures

ACCA visits

• Risk based approach
• Examination of

procedures, processes and quality controls

• Inspection of audit files
• Focus on assisting firms
• Root cause analysis

Key features

ACCA visits

Practice Assurance Review

Anti-money laundering

MLR 2017

MLROs did well with good staff training Commercially available MLR systems worked better than those developed in-house Be aware of sources for electronic checks ICAEW review may get tougher!

GDPR

The good

96% had registered with the Information Commissioner’s Office 99% had considered what changes they needed to make 83% had determined and documented the lawful basis for processing data 86% had procedures in place relating to personal data breaches 81% had nominated a data protection lead or DPO

GDPR

Not so good

• nly 71% of firms

reviewed had carried out an information audit for GDPR 29% had not fully considered how to consider compliance with the regulations on an

• ngoing basis

33% still needed to consider the role of their websites in terms of what information they collected and how it is processed

Client money

1/6th of firms

No trust letters No designated bank accounts for amounts over £10,000 for 30 days Implementation of Regulation 8A – you are not a bank!

Gifts and hospitality

Issues

Some firms didn't have policies Monetary limits varied for gifts £25 - £1,000 Hospitality thresholds £25 - £100 per head Up to £10,000 for non- audit clients!! More importantly – you have to have a policy and communicate it.

Client 2019 visits

Will focus on

Payroll Conflicts

• f interest

Whistle- blowing

New Anti-money laundering directive and refresher

฀Extending AML requirements to virtual currency exchanges, wallet providers, and letting intermediaries where monthly rent is

• ver 10,000 euros;

฀Updates to CDD provisions to reflect increasing use of electronic due diligence; and also documenting difficulties in the verification process where the senior managing official is a beneficial owner of the entity; ฀A responsibility when doing CDD to check that the client has filed beneficial ownership details with the registrar (i.e. Companies House) and report any discrepancies you identify. ฀Each member state will produce a list of public functions that would make someone a PEP. ฀All self-regulatory bodies (including ICAEW) will need to publish an annual report about their compliance monitoring and detected AML breaches. ฀Public bodes will be required to publish information on the AML risks they have identified, and what their response has been including the human and financial resources applied.

Legislation due early 2020 The highlights include:

5th Anti- Money Laundering Directive

• EU member states required to

implement by 26 June 2017

Approved by EU Parliament 20 May 2015

• Launched by HM Treasury in

September 2016

• Consultation closed 10 November 2016

Consultation

• Issued in draft in March
• Further consultation – closed 12 April
• Final regulations issued 22 June 2017

Money Laundering Regulations

4th Anti- Money Laundering Directive - refresher

RISK

4th Anti- Money Laundering Directive - refresher

Low risk Normal due diligence

Risk assessment – Why?

Higher risk Enhanced due diligence

High risk Run far, run fast?

So what?

"Some of those accountants involved in money laundering cases are assessed to be complicit or wilfully blind to money laundering risks, though the majority of these cases are likely to involve criminal exploitation of negligent or unwitting professionals.''

• Financial Statement preparation
• Management Accounts preparation and

bookkeeping

• Payroll
• Statutory audit
• Internal audit
• Taxation compliance and planning services
• VAT compliance and planning services
• Company Secretarial work

Lower risk

Risk assessment – by service

• Handling client money where the source of the funds

is not proven and where assets are to be purchased with the monies

• Implementing offshore company and trust structures,

where tax evasion may be the primary motive

• Handling insolvent estates where assets are tainted

by crime

• Taxation advice where the client may be involved in

tax evasion

• Forensic accountancy services where crime may be

involved Higher risk

Risk assessment – by service

Higher risk

• Clients who are high profile and

attract controversy

• Those clients involved in higher risk

sectors and jurisdictions

• Any clients where the firm has

concerns that they could potentially be involved in illegal activities (e.g. tax evaders seeking advice to resolve their affairs, and certain forensic work connected to fraud and other crime)

Risk assessment – the client’s circumstances

Who?

• Credit or financial institution

subject to the provisions of the MLR

• Companies listed on

regulated market or equivalent overseas requirements

• UK public authorities and

certain other public authorities

Simplified due diligence SDD

Can you rely on third parties, like lawyers or other accountants?

• In theory yes, in practice

probably not

• Assess the risks
• Obtain permission to rely

upon third party due diligence

• Consider obtaining copies

Question?

What if the client is not physically present?

• Maybe OK
• Get more evidence
• Obtain notarised

versions of documents?

Question?

• 1. Have there been any changes in the directors or

partners? Have we got ID?

• 2. Have there been changes to shareholdings /

beneficial owners?

• 3. Has there been any change to the nature of the

business?

• 4. Are there any unusual transactions we have not

been able to substantiate?

• 5. Are there any cash transactions outside the

normal transactions of the business we cannot substantiate?

• 6. Are there any other issues which increase the

level of perceived risk?

Checklist

Ongoing due diligence

Proceeds from crime Knowledge or suspicion For tax offences intent is usually needed for it to be criminal Warn once, then report

AML Reporting – the basics

Going concern

ISA 570

Going concern

How to restore public confidence?

Going Concern – an accounting issue

..where management intend to cease or there is no realistic alternative to cease Disclose ‘material uncertainties casting significant doubt’

Alternative basis Going concern basis

Qualified accountants are not allowed to have their names associated with misleading financial statements

at least 12 months from accounts approval date

The going concern review

NOT 12 months from the balance sheet date

at least 12 months from accounts approval date

The going concern review

NOT 12 months from the balance sheet date

Method of assessment

Small Companies Probably less formal Profitable Companies Less evidence

Financial distress More evidence – cashflow forecasts etc

Group support Get evidence – letter of support

• ..adopt the going concern basis of

accounting and must make appropriate disclosures

FRS 102

• ..adopt the going concern basis of

accounting and are encouraged to make appropriate disclosures

FRS 102 1A FRS 105

Going concern – material uncertainty

Going Concern – an accounting basis

Alternative basis?

• Break up basis?
• Going concern basis

with impairment reviews

Going concern basis

Audit report

ICAEW Audit monitoring visits

• ISA 500 comes in at number one! Areas

particularly subject to weakness include testing of revenue, fixed assets, stock and work in progress and other areas which involve professional judgement, such as goodwill and other intangible assets.

• 1. ISA 500

Audit Evidence

• Firms are failing to record important aspects of

their audit work on key assertions in material areas, or key areas of judgement. Where audit firms use electronic files, ICAEW have found that key working papers have not been attached or that electronic files are not archived on a timely basis.

• 2. ISA 230

Audit Documentation

Top 10 Findings

• ICAEW cannot always see how well the auditor

understands the client’s business and activities or that the required design and implementation testing has been carried out. In addition, during their reviews of audits, ICAEW sometimes identify apparently significant risks which have not been identified.

• 3. ISA 315 Identifying

and Assessing the Risks of Material Misstatement Through Understanding of the Entity and Its Environment

• Firms sometimes extract samples from a

restricted population (an example cited by the report is in respect of overdue trade debtors with no testing of trade debtors within credit terms at the year end). Also firms sometimes reduce sample sizes as they are placing reliance on the client’s internal controls without testing controls.

• 4. ISA 530 Audit

Sampling

Top 10 Findings

• Fraud must be discussed amongst the

engagement team

• Test journals
• Rebuttal of revenue and override risks
• 5. ISA 240 The

Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

• In many profitable and financially

sound businesses, going concern may not pose a particular risk. However, for some entities judgements can be difficult and this is what makes going concern a high risk area

• 6. ISA 570 Going

Concern

Top 10 Findings

• The report confirms that group audits

can present major challenges to audit firms – particularly where the group contains overseas components and the firm lacks experience in dealing with these.

• 7. ISA 600 Special

Considerations – Audits of Group Financial Statements (Including the Work

• f Component

Auditors)

• ICAEW are concerned that firms are

placing reliance on the use of service

• rganisations without following the ISA.
• 8. ISA 402 Audit

Considerations Relating to an Entity Using a Service Organisation

Top 10 Findings

• Lack of evidence that the firm has

made appropriate inquiries of those charged with governance

• The firm knows the related parties

but they are not documented

• 9. ISA 550

Related Parties

• Firms do not always obtain all the

required representations.

• Firms do not always use a

standard template

• 10. ISA 580

Written Representations

Top 10 Findings

FRC regulatory cases

The failings

• Materiality
• Revenue
• Going

concern

Laura Ashley Findings

Till records/Internet sales Accounting records Financial statements

Audit of revenue – using CAATs

Planned tests – would have worked Actual tests – did not work!

Inventory management system Accounting records Financial statements

Not enough evidence

• The company had an overdraft

near its limit

• Right of offset over bank cash

balances was ignored

• Cash demands for pre-

Christmas stocking was recognised but not determined in detail

• Management weren't asked to

produce forecasts

• Auditor commented on the

budget that it was “very ambitious”

Going concern

Redcentric PLC Findings

IES 8 Professional competence for engagement partners

IES 7 IES 8

International Education Standards

• Reflect
• Act
• Impact
• IES will add emphasis

for QAD visits

IES 8 1 July 2016 ICAEW aleady comply:

QAD visits and ISQC 1 Sufficient CPD Mid year review? Specialist CPD