When the interim report discussing whether a shake up was required in UK financial reporting and auditing was unveiled last week in the House of Commons, you could almost sense a collective sigh of relief from accountants who have vehemently defended UK auditing.
Prominent figures within the accountancy industry, in particular ICAEW president Peter Wyman, have been working round the clock to mitigate the chance of ministers with little financial and business acumen using the fragile environment to make radical changes for perceptions’ sake.
At risk, they believed, was the entrepreneurial spirit the government has been trying to forge.
But Wyman had no need to worry as Hewitt’s report proposes very little far-reaching change.
Hewitt wants a five-year rotation period for lead audit partners, more or less in line with the seven years sought by the ICAEW. And the secretary of state has accepted the two-year cooling off period before an auditor can move to a client – a measure also backed by the institute.
The report also recommends that the Financial Reporting and Review Panel, the body that polices company reporting, becomes more proactive while the new accounting watchdog, the Foundation, gets an early review. The audit working group will also look at the Foundation’s funding.
Hewitt also indicated that there could be a tightening up on which non-audit services an auditor can provide to a client, but made no mention of mandatory separation of audit from consultancy.
The burning issue and one that has split the business environment – audit firm rotation – was all but fudged by the government.
Unlike the report issued a day earlier by the Treasury select committee that deemed it crucial at the very minimum to have a mandatory five-yearly review of a company’s auditor, Hewitt’s report concluded there was still no evidence to support the need for audit firm rotation.
However, the report said the issue would be looked at by the Financial Services Authority in its review of the listing rules due to be completed at the earliest in June 2003.
Most reforms will focus on tightening audit committees and much of the onus will lie on non-executive directors. This is entirely in tune with the direction the ICAEW and other institutes took soon after the Enron scandal emerged. Non-execs on the audit committee will see their role strengthened, will be responsible for appointing the auditor and should approve the procurement of non-audit services from the auditor.
‘We are glad to see that areas such as compulsory rotation of audit firms and restricting the range of non-audit services a firm can provide have been referred forward for the further careful consideration they deserve,’ comments KPMG’s Mike Rake.
But one issue that could disturb the institutes and firms is that the report doesn’t rule out a competition investigation of the Big Four now that Andersens is part of Deloitte & Touche.
But watch this space. It is, after all, just an interim report.
PROPOSALS AT A GLANCE
- Audit committees should have principle responsibility for appointing auditors and should approve the purchase of non-audit services.
- Financial Reporting Council to develop code of guidance for audit committees.
- More research to determine which services are incompatible with auditor independence.
- Case for mandatory rotation of audit firms to be investigated further.
- Lead partners should rotate every five years, not seven, as currently.
- Major accountancy firms are recommended to publish full financial statements and accounts with a call for further work on whether this should be a condition of appointment.
- Review of the Accountancy Foundation’s regulatory arrangements brought forward.
- More pro active and wide-ranging enforcement of accounting standards.
- The Financial Reporting Review Panel is encouraged to introduce pro active enforcement work as soon as possible.
- Recommendation that the department of trade and the Treasury should discuss with the Office of Fair Trading whether there are any competition implications resulting from the high concentration in the market for audit and accountancy services.
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