Row over non-audit services rages as FRC prepares review

It may be months away, but the accounting watchdog’s impending review of non-audit services has led to speculation in the industry that a clampdown could be on the way.

The Financial Reporting Council is preparing a consultation paper on audit and non-audit fees following the Treasury Select Committee’s ninth report into the banking crisis released in May.

The hotly debated issue, which has been discussed on and off since before the Enron collapse, is about to rear its head again with some worried that it may trigger a heavy handed response without good cause.

Critics of the current system say auditors’ independence is compromised when they take on non-audit work ­ sometimes worth significantly more than the original audit.

Others argue auditors are best placed for this type of work and the definition of non-audit work catches what is often done as a result of a statutory audit anyway.

The level of concern within the accounting profession is so pronounced ­ some are already voicing concerns privately in a bid to shape the emerging public debate.
They also point out that not a single audit has failed due to the conflict.

The issue, however, was enough to give the Treasury committee cause for concern when it heard evidence in the wake of the financial crisis.

“We believe that, as economic agents, audit firms will face strong incentives to temper critical opinions of accounts prepared by executive boards, if there is a perceived risk that non-audit work could be jeopardised,” said the committee.

“Representatives of the investor community told us of their scepticism that audit independence could be maintained under such circumstances.”

David Ellis, investment group Pirc’s UK corporate governance manager, believes audit and non-audit work remains a conflict of interest. “We await the FRC’s paper with interest, but we continue to disagree with the view that audit firms can be employed to provide consultancy services to management at the same time as undertaking an independent audit on behalf of the shareholders,” he said.

“We firmly believe other commercial interests can compromise auditors in their ability to confront directors on difficult issues. Ideally therefore we would favour a prohibition on non-audit services being provided.”

Others in the field believe the spotlight should fall on the internal audit committees, believing greater transparency over why firms are selected may help to demystify the practice.

Earlier this month Deloitte’s ratio of audit to non-audit fee for failed car maker MG Rover was revealed as 15:1, however, this figure is generally lower for public companies.

IN OUR VIEW

This issue might be dismissed as a recurring “perception issue”, but we live in an age when trust in financial organisations is at an all time low, when perception is reality and a perceived conflict of interest can be as bad as a real one. That should be enough to warrant a fresh look at the issue.