Auditors say it’s time for action

IT’S RARE that the regulated complain about the lack of action from the regulator, but that’s exactly what auditors are beginning to do.

Together with the Bank of England and the Financial Services Authority (FSA), auditors have been drawing up new protocols that are attempting to go some way to restoring the once close relationship they had with bank supervisors.

But, while discussions are quite advanced, the official process to ratify them is limping along, worrying auditors who fear Europe-wide draconian measures, being discussed across the channel, may take over the process.

“The need for a proper consultation and finalisation process for the guidance on trilateral processes is urgent,” said one senior London auditor.

The reforms being discussed will establish a framework for new regular meetings between audit teams and bank supervisors. They will also set out standards of best practice for auditors and mandate regular trilateral meetings with banking staff, auditors and regulators. Auditors will also receive tip-offs from regulators seeking to draw their attention to problem areas in the companies they audit.

graph-audit-action-powell-quoteBut the FSA finds itself in the odd position of preparing new measures to be eventually used by its replacement, the Bank of England, sparking worries the reforms will be postponed or that the FSA will simply drag its feet on the matter.

It’s no surprise the Bank of England have been leading the talks so far.

“The bank is very much in the driving seat,” said another senior auditor close to the talks.

The FSA has declined to comment on the status of the reforms, which all adds to the frustration felt by auditors who are continually looking over their shoulders at more invasive regulatory measures now being debated in Brussels.

Michel Barnier could not have been more emphatic when he launched the European Commission’s audit reform consultation in October.

“With audit firms, as with other sectors, the status quo is not an option, the status quo will not be an option for the European Commission,” he said.

The deadline for written submissions has now passed. The next phase of the consultation will involve roundtables where the arguments and positions among various factions will begin to coalesce – a short window of opportunity for London to rollout its own reforms in the area.

Barnier’s proposals – including mandatory rotation, caps on advisory fees and joint audits – have so far sent jitters through the audit industry, forcing one major Big Four accounting firm to write a personal plea to prime minister David Cameron.

John Connolly, senior partner at Deloitte, wrote to the prime minister asking him to “lead the debate” in the face of the reforms that auditors believe are heavy handed.

If the FSA gets its act together, it’s hoped the UK audit industry may sieze upon this small window of opportunity to escape some of the drastic measures being put forward in Europe.
This is all part of an attempt by the city to sculpt the shape of audit reform.

The Bank of England’s dialogue-driven approach contrasts Europe’s bureaucratic one. If London can prove it has a fully functioning alternative, it may sway the debate in the Big Four’s favour.
The relationship between auditors and bank supervisors has so far come in for some withering criticism by the vociferous former chancellor Lord Lawson.

Lawson, who sits on a House of Lords committee investigating the role of audit in the crisis, has articulated, like few others, the need
for better communication between bank supervisors and auditors.
While chancellor he authored the 1987 Banking Act, which formalised ties between the Bank of England and auditors. However, frustratingly for Lawson, the system was not carried over into the Financial Markets and Services Act in 2000.

“When I was chancellor in 1984 I set up a committee to look into the question of banking supervision in this country and to make recommendations… among its important conclusions were that the iron curtain of confidentiality that separated bank supervisors from bank auditors should be replaced by a regular dialogue,” he told the committee.

In the intervening twenty years, the iron curtain was drawn once more after the Bank of England was stripped of its supervisory powers, which were handed to the FSA by the 1997 Labour government.
Auditors themselves have lamented the death of the once-close relationship.

“One of the key elements for me is, when you look back at the Banking Act 1987, there was a real encouragement at the time for a dialogue between regulators and auditors. That seems to have slipped away,” said Ian Powell, senior partner of PwC UK, in his testimony to the House of Lords.

A brief window of opportunity exists for auditors to set in motion reforms in the UK, to try and deter the harsher aspects of proposals mooted at a European level. But without support from regulators the whole enterprise could fail. For auditors, 2011 promises to be a pivotal year.


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