APB proposes shake-up of audit rules

Some of the UK’s biggest institutional investors have backed a proposal by the Auditing Practices Board to allow lead audit partners to stay at large companies for seven years, two years longer than allowed under current rules.

The Association of British Insurers, whose members control assets equivalent to a quarter of the UK’s capital, welcomed the audit watchdog’s proposal to extend the time an audit engagement partner can stay at a large listed company before moving to another client, if given permission by the company’s audit committee.

Shareholder groups have previously expressed concerns over audit firms gaining too cosy a relationship with their clients, undermining the auditor’s independence.

However, Michael McKersie, assistant director, capital markets, at the ABI, said: ‘The [APB proposal] is the right way to go but any change needs to be done within the framework of corporate governance. It would be wrong if seven years for auditor rotation became the default position.’

The APB consultation on updating ethical standards for auditors, announced earlier this week, also proposes closing a loophole in rules for firms selling advisory services to audit clients.

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

It is considering extending this proposed ban to cover other partners and staff, even if they play only a minor role in an audit.

The Audit Inspection Unit, another arm of the Financial Reporting Council alongside the APB, highlighted this loophole in a report on the UK’s seven biggest auditors last December.

Richard Sexton, PwC’s UK head of assurance, welcomed the APB clarification on auditors selling advisory services.