More regulation expected in the wake of economic crisis

The global economic crisis will result in more regulation of accountants and slow moves towards global accounting standards, experts have predicted.

As the banking crisis deepened this week academics said the economic fallout could have far-reaching implications for the profession.

Some pointed to parallels with previous economic crises and corporate scandals when governments pushed though regulation of the accountancy profession in an effort to restore order.

But, on a brighter note, experts said the current economic crisis was unlikely to trigger a wave of
litigation against auditors of collapsed firms.

Prem Sikka, professor of accounting at Essex Business School, said: ‘I expect accounting and auditing standard setting to be much more politicised and subject to greater intervention by state bodies.

‘When the dust settles down there is likely to be a closer scrutiny of auditors as many distressed and failed banks received clean audit opinions. Some collapsed within days of receiving unqualified
audit reports.’

Sikka, a vocal critic of the profession, also predicted that the Financial Reporting Council, one of the City’s top regulators, could be forced to monitor audit firms more closely or risk being replaced by a
new body.

He said audit firms could come under pressure to provide more information about their relationship with clients and directors and move to ‘real time’ audits, in which they scrutinise accounts of large clients daily rather than annually.

Many of today’s accountancy institutes and regulatory bodies were set up in response to economic crises and corporate scandals. The ICAEW was formed in 1853 after the widows and orphans scandals of the railway boom.

The UK’s secondary banking crisis of the mid-1970s helped usher in a new tier of regulatory bodies for the accountancy profession, including the Joint Disciplinary Scheme in 1979.

In the US, the Securities and Exchange Commission (SEC) was founded in 1934 to help restore market confidence and protect investors after the Great Depression.

Some experts said the accountancy profession was already highly regulated, making further regul-ation less likely. ‘The profession is much more regulated than doctors or lawyers,’ said Stella Fearnley, professor in accounting at Bournemouth University.

Sunil Poshakwale, professor of international finance at Cranfield School of Management, said the economic crisis had exposed shortcomings in the training accounting firms and institutes give their employees and members. ‘The accounting profession has been lagging somewhat in catching up with the pace of change in investment banking. They need to go back to the drawing board for training.’