The squeeze on auditors

Auditors will be smar ting this week as they consider the implications of a discussion paper put out by the UK’s biggest financial regulators. It said, rather bluntly, that they were concerned about a “worr ying lack of scepticism” among UK auditors. Paul Sharma is the man fronting the debate for the FSA.

WHAT’S HAPPENED?

In short, the credit crunch, the collapse of Nor thern Rock and the recession has prompted a lot of soul searching among regulators charged with keeping financial companies on the straight and narrow. So far the banks have attracted the most attention, but now the regulators, still fired up with trying to show they can cope, have turned their attention to auditors.

But what took auditors by surprise was the aggression and vehemence contained in last week’s discussion paper released jointly by the Financial Repor ting Council and the FSA. Though it was a combined ef for t the language had the FSA’s imprint all over it.

In his own quotes on the paper Sharma said the FSA’s experience was that “at times” auditors have failed to exercise the right degree of scepticism when dealing with clients. Sharma said: “This falls far short of what the FSA and society at large expects from auditors.”

Few auditors expected that and the paper went on to propose more unexpected measures such as giving the FSA new powers to censure, fine or even disqualify an auditor from working with a public company. And if that lef t auditors reeling they may have felt the hurt all the more because Sharma is effectively one of their own.

Though he joined the FSA at its inception back in 1997 he is a chartered accountant and has worked for Ernst & Young and is a specialist in financial services audit with a masters in maths from Cambridge.

WHAT HAPPENS NEXT?

It’s wor th bearing in mind that Sharma, in his current role, is ef fectively a product of the crisis. He was promoted to director of prudential regulation in April 2008.

His appointment came as the FSA was re-engineering itself in the wake of stinging criticism after its failure to deal with the catastrophe that hit Northern Rock. In fact Sharma was pushed centre stage to lead the good fight even as the FSA was saying goodbye to the man who was in charge of supervising the Rock. As a result of that move, Sharma has been pushed out to get across the message that FSA had changed and that it will do things differently.

Last month he was quoted in the Daily Telegraph saying: “A lot of what you see now in the way of enforcement is directly applicable to what we learnt from that situation as well as the aftermath of Lehman Brothers.”

A quick read of last week’s discussion paper indicates that the new attitude is feeding into the approach to auditors. In fact there seems to be a campaigning zeal in the paper and tone which indicates that the regulators really believe change is necessary. They seem determined to make their arguments stick.