PracticeAuditAccountancy gets the all clear

Accountancy gets the all clear

Trade and industry secretary Patricia Hewitt last week finally revealed her thinking on the reform of accountancy and audit. And the message she sent was largely that things are OK as they are. Yes, she ordered some tidying up of the watchdogs, but on the whole she sent out a clear signal that the existing UK arrangements are for the most part up to scratch and that no great overhaul is needed.

The Big Four heaved a heavy sigh of relief.

As we look back on the manifesto for change published by Accountancy Age last year, we see that Hewitt and the Co-ordinating Group on Audit and Accounting Issues undertook examinations of many of the issues we raised.

They looked at mandatory audit rotation and the objectivity question.

They looked at the information provided by auditors about the work they undertake for client companies and they took a close look at whether auditors working for listed companies should publish their own annual report and accounts.

But shareholders, whether individual or the big funds, will be thinking back to the end of January last year when Financial Services Authority chairman Sir Howard Davis stunned the City by saying that an unpredicted, Enron-type corporate failure could happen in the UK.

And they’ll be asking themselves, after all the talk, the debates, the reports and declared intentions of the government, is the risk of disaster any less now than it was before?

The Accountancy Age manifesto was really an agenda for finding ways of making sure that the risk was reduced. It proposed that government and accountants look at a set of possible reforms that could make a difference.

It was written in the hope that a close and sincere examination would offer reassurance that the issues were being taken seriously.

But it was also drawn up in the hope that there wouldn’t just be talk but also action that would send a clear signal that those in charge could act to head off catastrophe before the ship struck the iceberg.

However, it was the firms – in particular the Big Four – that acted first by moving to put great distance between audit and consultancy in a bid to head off the possibility of government coming up with a regulatory straight jacket.

Last week Hewitt revealed she felt that was enough for now by not demanding anything further of the firms on the objectivity front.

Yes, we will get some sort of code of ethics, and a further review of which services can be supplied by auditors is on the way. But Hewitt has stayed well away from making any kind of pronouncement on where the boundaries should really be.

Indeed we don’t yet know whether the kind of relationships the firms used to promote between audit and consultancy would be blocked by any of the new arrangements.

In another area too Hewitt has taken ‘moderation’ as a watch word to determine her actions.

Before the review, one regularly aired suggestion for ensuring objectivity in the audit was through mandatory rotation of audit firms. Accountancy Age proposed that we should at the very least be looking at compulsory retendering. Hewitt and the co-ordinating group rejected both emphatically and settled for the profession’s answer which was to ensure lead partners on an audit change every five years instead of every seven.

Some observers are appalled. The refusal to engage with mandatory rotation or retendering is viewed by critics as ducking the issue while the search for a code of ethics on non-audit services only brings more delay and allows the government to perform a neat side-step to avoid setting down clear rules. The government has failed, in the words of one observer, to deal with the ‘cosy relationships’ between auditors and their clients.

Efforts made by firms and professional bodies to avoid onerous regulation appear to have worked, with the trade secretary accepting that the improvements require little further interference from government.

There are those though – and early indications are that large shareholders are among them – who believe an opportunity has been missed. What the trade secretary and the profession has done, is done something. But noises are already being made that having done something does not add up to having done the right thing.

The risk facing Hewitt now is that having concluded that there are no fundamental issues to be addressed on corporate governance, UK plc begins to look complacent when compared with the wrenching and painful reform process foisted on US businesses.

One senior member of the co-ordinating group has remarked that the UK reforms aren’t more strident because in the immediate aftermath of Enron a similar event did not explode in the UK. The implication being that if it had, the government might have chosen a different course. But it also suggests that the co-ordinating group always assumed the UK system was good because nothing had happened and failed to ask whether the system ‘could’ allow something to happen.

That could create a perception of complacency. And the profession needs that like it needs another Andersen/Enron double act. Because if it gains a foothold among the public and shareholders the whole of the past year could have been for nothing.

  • Gavin Hinks is Accountancy Age’s news editor and compiled the manifesto. AA MANIFESTO FOR CHANGE 1. Review independence/retendering of auditors 2. Set up indemnity fund 3. Publish fuller auditors’ reports 4. Require firms to publish annual reports 5. Disclose directors’ remuneration 6. Reform National Audit Office & Audit Commission 7. Legislate to tackle late payment 8. Raise audit exemption threshold 9. Make social reporting mandatory 10. Set up tax practice committee.

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