Audit reform may lead to major disruption

Paul Boyle, stepping down at FRC

A recommendation by MPs for a blanket ban on audit firms selling non-audit services to clients could cause major disruption to companies and their auditors, the head of the UK’s accounting watchdog has warned.

Paul Boyle, chief executive of the Financial Reporting Council, said that it plans to begin a consultation on the subject this summer, after a report by the Treasury committee called for a ban on auditors providing non-audit services, such as tax or IT consultancy, to clients.

‘A complete ban on non-audit services would be a dramatic change from where we are now,’ Boyle told Accountancy Age. ‘If this ban is imposed an audit firm has a question to answer. Either it resigns from the audit and seeks to carry on providing non-audit services, or does it [the audit firm] resign from non-audit services and carry on with the audit?’

Critics of the audit industry have long claimed that the sale of advisory services to audit clients poses a conflict of interest and undermines the independence of the auditor.

The big audit firms claimed to have sorted the problem earlier this decade by selling their consultancy arms in the wake of the Enron scandal.

But in the Treasury committee’s final report into the banking crisis, which was published last week and examined the role of auditors, MPs reignited the debate about the issue. They said: ‘We strongly believe that investor confidence and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work for the same company and recommend that the Financial Reporting Council consult on this proposal at the earliest opportunity.’

Boyle, who is due to resign from the FRC after his successor takes over in November, stressed that the FRC had an open mind on the issue. He added that that any change in restrictions on non-advisory services would have to be phased in to avoid unnecessary disruption, as companies could be forced to switch their auditor or business adviser.

‘If you ban non-audit services you would literally have hundreds of non-independent audit firms, so you can’t do this overnight.’