While many of its recommendations are simply confirming best practice, others may raise objections from within the profession.
The APB has been working on its ethical standards since it was assigned the task by the government in January. It had previously been the responsibility of accountancy institutes to advise their members on such matters.
The standards have arrived at a time when the board is transferring from the Accountancy Foundation to the Financial Reporting Council, under the guidance of FRC chairman Sir Bryan Nicholson (pictured). They set out the principles that auditors should adhere to and how they should be enforced.
Two of the more incendiary suggestions in the draft standards deal with the perennial hot topic of provision of non-audit services. An entire standard is devoted to this and while advice from the EC and IFAC has been available for some time, the APB’s work expands on this significantly.
‘This is the first time anyone has dealt with the issue of auditors providing tax services, and we have also had a detailed look at corporate finance,’ said APB executive director Jon Grant. ‘We expect quite a bit of reaction from firms.’
Contorversy could also dog one of the recommendations in the fourth standard.
It states that audit partners should not be remunerated or promoted on the basis of their success in selling other services to a client. But the APB acknowledges that this is a difficult area to police.
‘Promotion is a soft area and it would be difficult to establish, with any certainty, whether this has been achieved due to selling non-audit services,’ said Grant. ‘We see this as an area where the ethics partner would play an important role in ensuring the spirit of the standards are adhered to.’
The establishment of an ‘ethics partner’ is set out in the body’s first standard. The role of this part-ner is to ensure that the new standards are understood and complied with by the firm.
The APB hopes that such a role will be taken on by partners with seniority.
It is expected to be a full-time job for those within larger firms.
Auditor rotation is addressed in the third standard. It has been long standing practice that partners should not work with a client for more than seven years, although following the Enron and WorldCom scandals many institutes have produced interim guidance shortening this to five. The standard sets this in stone and advises that even smaller firms have policies in place to deal with the rotation of auditors.
Smaller firms could also oppose one of the provisions in the fourth standard, which states that no single audit client should account for more than 10% of a firm’s income, meaning a firm has to have a minimum of 10 clients.
‘Independence is at risk if too much of a firm’s fees come from one place,’ said Grant. ‘Can a firm risk losing its client if it accounts for, say a fifth of its income.’
The standards have received a cautious welcome from the profession.
But the APB wants to hear from a wide range of groups, including shareholders, financial directors and other users of financial statements. The consultation period ends on 1 March 2004.
For more go to www.accountancyfoundation.com/auditing_practices_board
AREAS COVERED BY THE APB DRAFT ETHICAL STANDARDS
- ES1: Integrity, objectivity and independence
- ES2: Financial business, employment and personal relationships
- ES3: Long association with the audit engagement
- ES4: Fees, economic dependence, remuneration and evaluation policies, litigation, gifts and hospitality
- ES5: Non-audit services provided to audit client.
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