Audit watchdog moves to close consultancy services loophole

Accounting firms will face tougher restrictions on selling advisory work to audit clients, but some partners may be able to work with a large client for up to seven years, under new proposals from the Auditing Practices Board.

The auditing watchdog has announced the possible changes in a consultation aimed at updating ethical standards for auditors.

One proposed change is a clarification in the rules for when partners involved in an audit can sell advisory or consulting work to the same client.

Current APB ethical standards only prohibit key people in a firm's audit team from being rewarded for selling advisory or consulting services to their audit client. The APB standards do not refer to staff outside the audit team, such as tax partners, who may also play a key role in the audit, and sell advisory services to the audit client.

This loophole in ethical standards was highlighted in a report last December by the Audit Inspection Unit.

The AIU report, which reviewed the UK's seven biggest auditors, found that PricewaterhouseCoopers may have breached ethical standards after tax partners involved in a client's audit were rewarded for selling non-audit services to the same audit client.

The AIU report reignited a debate about the independence of auditors and a blurring of the lines between audit and consultancy businesses within big accounting firms.

The APB consultation document has proposed that 'key partners' outside the audit team who have a significant role in an audit should be prohibited from selling advisory services to the same client.

The APB has also said that is it considering extending this proposed ban to cover other partners and staff in a firm even if they play only a minor role in an audit.

In response to the APB consultation, Richard Sexton, UK head of assurance at PwC
said: 'In our public response to the AIU report we reiterated that we follow auditing and ethical standards and observe the principles involved.'

'We reached this view after very careful consideration of the AIU's position. In addition, we stated that where the AIU believed that our interpretation of standards was not consistent with theirs, further guidance from the APB was needed. We therefore welcome this move by the APB to clarify the rules.'

Elsewhere in its consultation, the APB has proposed a relaxation of audit rotation rules by allowing the 'audit engagement partner' to stay at a large listed client for seven years before moving to a new client, rather than after five years under current rules.

The APB has suggested that the five-year rotation rule should 'remain the norm', but for large and complex clients, the company's audit committee should be allowed to request that the lead audit partner stays on the contract for two more years, to help improve the audit quality.

Any extension of the audit would have to be announced in the company's accounts.
Further reading:

APB issues a Consultation Paper and Exposure Draft of Amendments to Ethical Standards for Auditors