Government rejects Lords' call for mandatory audit dialogue

THE GOVERNMENT has rejected a key House of Lords recommendation calling for dialogue between auditors and regulators to become a legislative requirement.

Chairman of the Economic Affairs Committee Lord MacGregor said the response was "disappointing", adding: "Legislation mandating regular meetings - for example, every quarter - is the only way to ensure this lamentable near-breakdown in communication between bank auditors and regulators is never repeated."

The Lords' report on audit was damning, saying a breakdown in communication amounted to a dereliction of duty and concluding that such dialogue was "of the first importance".

The government said regular dialogue will result from the Financial Services Authority's recently issued Code of Practice, which covers the relationship between bank auditors and supervisors. However, the Lords do not agree.

MacGregor said the code "lacks teeth" as it has no statutory backing, meaning regular dialogue is by no means assured.

International Financial Reporting Standards also came under attack in the Lords' report, but here again the government failed to back up their findings. The committee concluded the use of IFRS limited auditors' scope to exercise prudent judgement, but the government has denied this assertion.

The full government response will be published this morning. One area where it did support the Lords was on their call for the Office of Fair Trading to investigate concentration in the market, with a possible referral to the Competition Commission.