Auditing review - the final countdown

We will now have to wait until early next year before seeing the full results of the government’s investigation into auditing, accountancy and everything.

The sense of urgency would appear to have gone from the Department of Trade & Industry and the Treasury’s joint review of audit and accountancy regulation. After a flurry of activity which saw the creation of several working parties and select committee investigations, the government announced last week the terms of reference for a full enquiry, which will report back in January next year.

Meanwhile, across the pond, the US has passed into law the Sarbanes-Oxley Act, which sets out new corporate governance standards for US listed firms, and includes the controversial ‘extra-territorial’ powers that have so vexed foreign accountants.

‘It is worth remembering that Sarbanes-Oxley is catching up with the UK,’ says ICAEW president Peter Wyman, claiming that the underlying principles, with the exception of extra-territoriality, were based largely on the UK’s experience.

‘Everyone is keen not to see any knee-jerk reaction here,’ Wyman continues, re-iterating the oft repeated desire not to introduce legislation that was ill-considered and not properly thought through.

As Wyman points out, companies in the US are still waiting for clarification on many parts of the new regime. ACCA agrees with this position, believing the political imperative to address the weaknesses in the US system led to ill-conceived legislation.

‘The US had to move so quickly for purely political reasons with the November elections looming,’ says Anthea Rose, ACCA’s chief executive.

‘As a result, it has probably produced hurried “answers” which will not be appropriate in two or three years time.’

ACCA joined with the ICAEW in welcoming a more measured and careful approach to a review of the UK system.

That said, the government review has actually brought forward an assessment of the workings of the Accountancy Foundation, the semi-independent regulator that has only really come into full operation over the past 18 months.

The original intention had been to review the Foundation after it had been in existence for five years, giving it the opportunity to bed down.

But because it took longer than anticipated to set up in the first place, followed by the heated debate over its funding, the government had little choice but to bring forward the review.

Ironically, campaigning organisations such as PIRC, the pensions and investment adviser, are willing to see how the Foundation beds down. ‘An immediate review of the Accountancy Foundation after it has only just been established creates a very confusing picture,’ says PIRC’s Stuart Bell.

But this does not mean to say he supports the Foundation.

According to Bell: ‘There is a very strong case for more independence and less self-regulation’.

This position is backed by ACCA.

Anthea Rose says the association will shortly be meeting with the DTI and will advise the department that, among other areas, its review needs to ‘review the funding arrangements and whether any changes are required to maintain an appropriate perception of independence’.

Rose says: ‘While we continue to support the objectives and work of the Foundation, we have some concerns about the way in which it has operated in practice and we have already suggested that public perception would be improved if the funding were channelled through government.’

This is not a view shared by Wyman, however. ‘I would be quite surprised if the government chipped in money to run it,’ he says, but he accepts that, ‘in the circumstances it is sensible to have a review’.

Wyman is relaxed at the speed with which the review is moving, noting that any slippage is as a result of the simultaneous review of non-executive directors, chaired by chartered accountant Derek Higgs.

This report is due to be published at the same time and will review the equally important role of non-executives in the corporate governance process.

Such reviews will go some way to easing investors’ fears, but as the clock continues to tick, there is still no definitive answer to the question: ‘Could Enron and WorldCom happen here?’ WHAT’S IN STORE? The terms of reference for the review of audit and accounting regulation – the review to look at: – what regulatory functions are needed, who should carry them out, and how they are funded, including the scope for simplifying the current arrangements; – whether the existing balance between professional self regulation and independent regulation is the right one, and whether there should be a statutory basis for regulation; and – the case for taking a different approach to the regulation of the accountancy profession in general and to the regulation of auditors in particular. Announcing the terms of reference Patricia Hewitt said: ‘High standards of audit and accounting are essential for our economy, for companies and capital markets, and the millions of people who invest in them.’