Analysis: FRC's Haddrill at the Treasury select commmittee

The Financial Reporting Council’s new chief executive made his debut before the Treasury Select committee yesterday and received a grilling on the issues that are likely to dominate the FRC’s agenda in the coming year.

Committee members, looking into the role of audit and accounting in the banking crisis, expressed concern that audit firms were beginning to ‘move back into consultancy’.

Challenged by committee member Jim Cousins MP, Stephen Haddrill was pressed to explain why some Big Four firms were affirming in public their desire to grow their non-audit fees.

Cousins claimed KPMG had said it wanted to treble its consultancy fees to £600m. Haddrill told Cousins that he assumed the firms would be seeking to grow their non-audit fees in general, but would not be doing that with their audit clients.

Cousins was persistent in his questioning of how the audit industry is regulated. His biggest concern was the inflated fees and lack of transparency over the work the Big Four undertook for their blue chip clients. Surely there must be a way, he said, to force audit firms to publish the amounts they receive for audit and non-audit work?

Haddrill, in a measured performance, conceded the current system of differentiating between audit and non-audit did throw up "absurdities" – work on interim accounts, for instance, is classed as non-audit – and said he would be working with a range of bodies to clarify this.

He also said his organisation would be monitoring the ratios of audit to non-audit fees.

Ian Patterson-Brown, convener of the ICAS Ethics Committee defended the increases, claiming that consultancy fees always rise during recession as businesses seek to cut costs and rationalise operations – for which they require advice.

In response to criticism from several MPs on the size of the fees received by the Big Four from banks in particular, Haddrill said that while it wasn’t his job to defend audit firms, he did believe substantial fees were justified if they were re-invested in training and staff development, in turn improving audit quality. The FRC is expected to report on its findings on the audit market in the next two months.

Following on from a similar hearing last year, this session covered a wide range of topics including the issues of transparency and the lack of competition in the market. Summing up, committee chairman John McFall asked the witnesses what they thought had changed since the advent of the financial crisis in 2008.

Haddrill said he believed that boards were now focusing more on the issue of risk management, and that international audit regulators were liaising on a more regular basis in order to tackle the issues that the financial crisis and its fallout has created.

Dr Steve Priddy, technical director of the ACCA and a last minute replacement for the absent chief executive Helen Brand, said he was seeing a strengthening of the role of audit committees in the wake of the Walker report on banking corporate governance. Robert Hodgkinson, executive director, technical of the ICAEW, meanwhile, defended the profession from criticism, claiming that the banking crisis wasn’t a failure of auditors, but did concede that lessons had to be learned about the impact of accounting decisions on the real economy.