Former FD attacks 'silly' audit reform

Institute of Directors

A recommendation by MPs for a blanket ban on bank auditors selling consultancy services to clients has been welcomed by a leading business group and a corporate governance advisory body but has been dismissed as ‘silly’ by a former finance director.

The Institute of Directors said public confidence in the audit industry could be boosted by audit firms becoming less reliant on non-audit services for income.

‘[Non-audit fees] are averaging four times the audit fee for the top FTSE 100 clients,’ the IOD said earlier this year in response to a consultation paper by the Audit Firm Governance Working Group. ‘Best practice should dictate that clients should not pay more in audit fees to their auditor than they pay for audit services.’

Last month, the Treasury select committee’s final report into the banking crisis said a ban on the sale of non-audit services to bank audit clients could boost investor trust in the audit process. Most of the big audit firms claimed to have sorted the problem earlier this decade by selling their consultancy arms in the wake of the Enron scandal.

Last week Paul Boyle, chief executive of the Financial Reporting Council, warned that a ban on consultancy services could cause major disruption to companies and their auditors, as firms could be forced to switch their auditor or business adviser.

Critics of the audit industry have long claimed that the sale of IT and tax advisory services to clients poses a conflict of interest and undermines auditor independence.

Pirc, the shareholder advisory body, said: ‘We firmly believe that these other commercial interests will compromise the auditors in their ability to confront directors on difficult issues. As a general principle, we consider that other professionals should undertake all non-audit work and would wish to see a prohibition on non-audit services being provided by the auditor.’

However, Eric Tracey, a former FD of companies including Amey, the support services company, said the Treasury committee’s proposal was a ‘very silly idea’.

Tracey, a former partner at Deloitte & Touche and now senior non-executive director at Chloride Group, the power systems supplier, said listed companies use internal audit committees to decide which advisory services auditors can sell to their clients.

‘Audit committees will normally ban services such as tax planning and internal audit and IT services but it may be OK for an auditor to provide services such as due diligence,’ he said. He added that a blanket ban on auditors providing advisory services would ‘effectively weaken’ firms and undermine their independence’.

Among the mid-tier accounting firms, however, there is some support for a ban on audit firms selling advisory services, according to a very senior source in the profession.

But the head of one mid-tier firm said external regulation of bank audits was needed to help restore public confidence in the process.

Bank auditors should have to demonstrate sufficient knowledge and experience to a regulator, such as the FSA or a government department such as the Department for Business Enterprise & Regulatory Reforms, the source said. ‘The problems come when the auditor does not understand what it is auditing.’