In the evolving world of modern business, there’s an increasing focus on compliance, transparency, governance and assurance.
One report that’s increasingly gaining additional attention is the 01/20 AAF Assurance reports on internal controls of service organisations made available to third parties (AAF 01/20). In this article, we outline what an AAF 01/20 report is, why a business should consider preparing and getting assurance over one, as well as potential next steps.
What is an AAF 01/20 controls report?
Many end clients outsource aspects of their business activities to third party organisations that provide them with services. These activities range from performing a specific task under the direction of the end client, to replacing entire business units or functions.
The AAF 01/20 report offers assurance over these outsourced services, specifically focusing on elements that would affect financial reporting. The AAF 01/20 report and guidance has been developed to enable the service organisation to engage an independent service auditor to provide an assurance opinion over the relevant documented controls. This assurance opinion and report is made available to the end clients and their external auditors. The demand for these types of reports originated in the asset management sector, through demand from institutional investors.
However, the AAF 01/20 report can also be effectively prepared and applied to other activities where appropriate control objectives can be identified, which could include private equity, property investment management and administration, and custody management firms, amongst others. The ICAEW guidance includes a minimum set of control objectives, which apply by industry activity, that are required to be included in any controls report and should be consulted as part of preparing these reports.
Five reasons to consider preparing and getting assurance over an AAF 01/20 report:
1. It demonstrates robust controls
Showcasing a strong control environment can increase client and stakeholder confidence. The AAF 01/20 process results in an in-depth review of a firm’s internal controls. In an era where trust is paramount, presenting an AAF 01/20 report assures clients and stakeholders of your commitment to best practices. This demonstration of transparency can significantly boost your firm’s reputation and standing in the industry.
2. It can attract institutional investors
Institutional investors often require a higher level of assurance on the controls of their service organisations. The AAF 01/20 report, being a recognised standard, can be a compelling point of differentiation, attracting more institutional clients to your service organisation. This may result in higher levels of revenue from end clients through increased use of your service organisation, as well as referrals.
3. It enhances operational efficiency and reduces compliance burden on your team
The AAF 01/20 process involves a rigorous review of operational processes. This process of introspection can highlight inefficiencies and areas of improvement for the business, leading to streamlined operations and better service delivery for your clients. In addition, by undertaking this type of process, it can result in reduced queries and therefore staff time responding to your end client auditors.
4. It mitigates risks and provides a competitive advantage
The very nature of the AAF 01/20 report means that potential vulnerabilities within your operational procedures are identified and addressed. By rectifying these issues, firms can reduce operational and compliance risks, safeguarding both their reputation and their clients’ investments. With the increasing emphasis on good governance and robust operational controls, having an AAF 01/20 report can give you an edge over competitors.
5. It meets market expectation and prepares your business for future challenges
As industries and corporate governance becomes more regulated, demonstrating adherence to recognised standards like AAF 01/20 can position your firm favourably in the eyes of regulatory bodies. In terms of meeting future challenges, it may also become a market expectation in various industries for these types of reports to be produced. Businesses that do not undertake such reports could be potentially viewed as less transparent and less reliable as service providers by end clients.
In summary, undertaking an AAF 01/20 report is more than just a compliance activity and offers service organisations a range of benefits.
Please get in touch with Tom Alun-Jones to discuss what your AAF 01/20 report might look like, the provision of assurance services as service auditor, or answer any other queries that you may have on this topic.