PracticeAuditThe squeeze on auditors

The squeeze on auditors

Who's to blame for the financial crisis? The FSA's director of prudential regulation is pointing the finger at auditors

Auditors will be smar ting this week as they consider the implications of a
discussion paper put out by the UK’s biggest financial regulators. It said,
rather bluntly, that they were concerned about a “worr ying lack of scepticism”
among UK auditors. Paul Sharma is the man fronting the debate for the FSA.

WHAT’S HAPPENED?

In short, the credit crunch, the collapse of Nor thern Rock and the recession
has prompted a lot of soul searching among regulators charged with keeping
financial companies on the straight and narrow. So far the banks have attracted
the most attention, but now the regulators, still fired up with trying to show
they can cope, have turned their attention to auditors.

But what took auditors by surprise was the aggression and vehemence contained
in last week’s discussion paper released jointly by the Financial Repor ting
Council and the FSA. Though it was a combined ef for t the language had the
FSA’s imprint all over it.

In his own quotes on the paper Sharma said the FSA’s experience was that “at
times” auditors have failed to exercise the right degree of scepticism when
dealing with clients. Sharma said: “This falls far short of what the FSA and
society at large expects from auditors.”

Few auditors expected that and the paper went on to propose more unexpected
measures such as giving the FSA new powers to censure, fine or even disqualify
an auditor from working with a public company. And if that lef t auditors
reeling they may have felt the hurt all the more because Sharma is effectively
one of their own.

Though he joined the FSA at its inception back in 1997 he is a chartered
accountant and has worked for Ernst & Young and is a specialist in financial
services audit with a masters in maths from Cambridge.

WHAT HAPPENS NEXT?

It’s wor th bearing in mind that Sharma, in his current role, is ef fectively
a product of the crisis. He was promoted to director of prudential regulation in
April 2008.

His appointment came as the FSA was re-engineering itself in the wake of
stinging criticism after its failure to deal with the catastrophe that hit
Northern Rock. In fact Sharma was pushed centre stage to lead the good fight
even as the FSA was saying goodbye to the man who was in charge of supervising
the Rock. As a result of that move, Sharma has been pushed out to get across the
message that FSA had changed and that it will do things differently.

Last month he was quoted in the Daily Telegraph saying: “A lot of what you
see now in the way of enforcement is directly applicable to what we learnt from
that situation as well as the aftermath of Lehman Brothers.”

A quick read of last week’s discussion paper indicates that the new attitude
is feeding into the approach to auditors. In fact there seems to be a
campaigning zeal in the paper and tone which indicates that the regulators
really believe change is necessary. They seem determined to make their arguments
stick.

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