‘Sign off’ standard sparks fears

Concern is growing around an auditing standard – ISA 580 – asking that
directors evidence their commitment to proper controls through so-called
‘management representation’ letters.

Who, one might ask, could disagree with companies having stronger controls?
If the costs were worth it (and that is a very big if), surely that would be OK?

But many are sticking their heads above the parapet to criticise the proposed
standard, for two reasons.

One is that the letters could lead to mountains of paperwork. If all those
who speak to auditors have to get a legal sign-off, rather than just directors,
there could be a lot of unnecessary box ticking.

And further to that, there is a feeling that auditors might choose to rely on
those sign-offs rather than conducting a full and thorough audit.

The UK – represented by firms, companies and investors – has slated the
standard, and are set to do so further when they submit their collective views
to the APB by the end of April.

Representing the investment community Tim Bush, went so far as to say the
IAASB, which devised the standard, has ‘a poor understanding of [UK] Company

Hundred Group chairman of the financial reporting committee Ken Lever is also
backing the criticisms.

Lever said the issue of representation letters is something which had always
been of concern to companies, as they should not be used as a basis to
effectively get directors to represent things which auditors themselves ought to
establish and audit anyway.

‘We have to be careful we don’t end up with a situation of the tail waging
the dog whereby the representation letters are used just to help the auditors
feel comfortable with the information given. It could ultimately lead auditors
down a Sarbox route,’ he said.

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