Naming and shaming on the audit agenda

Last week the Audit Inspection Unit suggested its reports on individual audit
firms could be made public, leading to the possibility of ‘naming and shaming’
poor audit firms.

It was a surprising move, because all the signs were that the status quo
would be favoured. But even so, the principle of generalised reporting looked,
to outsiders, hopelessly inadequate.

But in June last year, when the consultation first opened, the announcement
this week did not look a likely prospect.

Sir John Bourn, head of the Professional Oversight Board, said then that the
board was keen to keep the fundamentals of the current model in place. ‘Giving
audit firms the opportunity to correct weaknesses on the basis of private
reports, and only “naming and shaming” where the response is inadequate,
provides the strongest incentive for firms to take action,’ Bourn said.

But in a surprising ambush, the Tories and cross-benchers forced through an
amendment to the companies bill in November of last year putting the POB within
the scope of the Freedom of Information Act.

Baroness Noakes, the Tory peer who proposed the amendment, protested that
audit quality reports on the work of major accountancy firms would otherwise
continue to remain private, with the publication of ‘only the blandest
summaries, despite the requirement under corporate governance rules for

the audit committees of company boards to make judgments about the
effectiveness of their auditors’.

Big Four sources say that was a critical moment. If the AIU had wanted to
continue publishing ‘the blandest summaries,’ then audit committee chairs and
journalists would have requested the individual reports under the FOI
provisions. Refusal at that stage would have looked evasive at best, and
arguably undermined confidence in the profession.

What can firms expect of the reports, and what do they think?

One PCAOB report, issued about Ernst & Young’s US firm in 2005
highlighted ‘deficiencies’, adding: ‘In some cases, the deficiencies identified
were of such significance that it appeared to the inspection team that the firm
had not, at the time it issued its audit report, obtained sufficient competent
evidential matter to support its opinion on the issuer’s financial statements.’

Whether or not the AIU will be so uncompromising or, indeed, whether there
are such problems in UK accounting to uncover, remain to be seen.

Some of the mid-tier, keen to prove that they are just as good as the Big
Four, have welcomed the moves.

BDO Stoy Hayward managing partner, Jeremy Newman, said: ‘We hope all
initiatives to increase transparency of the outcomes of independent audit
inspections will help to break down institutionalised prejudice about audit
quality and the prevailing assumptions that bigger means better in this

Grant Thornton backed the idea of opening up the reporting last year, and the
Big Four have also offered support for the moves.

Peter Wyman, head of professional affairs at PricewaterhouseCoopers, said:
‘We’ve reached the stage where something along the lines of what they’re
proposing is right and appropriate.’

KPMG’s head of audit, Richard Bennison, said: ‘Generally, I think we accept
that there has to be some enhanced disclosure of what the AIU is doing and
finding on individual firms. The key is in the reporting.’

All emphasised that they wanted the reports to be balanced. Martyn Jones of
Deloitte said: ‘A matter that is very important for firms is that the reporting
is balanced, so that it can highlight the features of the audit firms, giving
proper weight to the good things that the firms do by way of developing the
right approach to promoting audit quality.’

The news may be most welcome to the legal profession, cynics will also argue.
PCAOB reports regularly involve legal wranglings, and most parties, including
the regulator, have alluded to the ‘possibility’ of legal involvement.

Whatever happens, we may soon know more about how UK audits are conducted,
and whether, in each case, they are up to scratch.

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