Uncertainty principles

So says the Financial Reporting Council in its draft plan for 2009/10. The head of its Audit Inspection Unit says there are more difficulties around issues like going concern.

The FRC’s fears were writ large last year as two papers emerged from the regulator urging auditors not to make their default position to issue statements about ‘material uncertainty’ over a company’s ability to continue trading just because we are in recession.

What the FRC doesn’t want is auditors tipping companies over the edge for no good reason.

The audit inspectors will be looking at work in some key sectors to mirror the work of colleagues at the Financial Reporting Review Panel. They will use key criteria to select the audits they review: whether a big client is using a disproportionately small audit firm; large non-audit fees compared to a small audit cost, whether a client complies with the combined code on corporate governance.

But there are two things the AIU might consider. Firstly, the delay between inspection and publication of results. Inspections published at the end of last year came more than a year after the audits were completed. A speedier process would give them greater impact if they relate to topical events and show the regulator has reacted promptly.

Secondly, AIU reports give no indication which specific audits have been targeted. But, if the inspector wants to be seen to be acting on concerns in specific sectors, the public may need to be told which sectors. Some of that will be implicit. A report that highlights the faulty valuation of derivatives or securities might just give away the type of audit that has been reviewed. If you see that, wait for the protests to begin.

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