Licensed to audit?

Licensed to audit?

Licensing public interest entity auditors is seen by some as a simple but effective move to increase market confidence and fulfil the FRC's mandate, yet others view it as more red tape

THE DEBATE over the future of audit rages on and some actors are raking over old ideas, holding them up to the new light of increasing concern over the assurance of big public companies.

One such proposal to make a comeback is the idea of a system of licensing or registering auditors of public interest entities. Mooted in the past, some stakeholders see it once again as a potentially strong solution to a set of big questions bedeviling audit. Yet it is controversial due to the plethora of interested parties: firms, institutes and regulators all have their part to play and all have strong views on how the system should work.

Currently, firms are registered and overseen by supervisory bodies, otherwise known as the institutes. This is watched over by the Public Oversight Board, a sub-committee of the Financial Reporting Council (FRC) that monitors audit quality. The anomaly here is that, although the FRC can carry out inspections, it has no powers to sanction any wrongdoing. This responsibility falls to the institutes except in extreme circumstances.

If a new layer of FRC-led registration were introduced, what would it look like? One expert close to the Big Four fears the worst, warning that the regulator could swoop in to pick and choose audit teams with little regard for experience or expertise.

A less nuclear option would be to establish a system similar to the professionals licensing scheme run by Financial Services Authority, to which those performing regulated activities must register. This would allow conditions to be imposed – where necessary – on those holding a license, effectively keeping a closer check on auditors.

Paul George, director of the POB, envisions a more firm-led approach in which companies would put individuals forward for an audit and the licensing body would have the power to challenge the selection or impose sanctions where appropriate.

Supporters of the registration concept – which remains in an embryonic form – said it could boost confidence in audit where it has been battered during the financial crisis and subsequent years.

Richard Bint, senior partner at PKF, said it would increase market assurance, suggesting firms would be willing to bear any extra costs if the FRC provided “value for money” in regulation.

CIMA chief executive Charles Tilley said that the FRC “needs to be able to do its job well and be funded by those who benefit from the process” such as companies, firms and institutes. Efficient financial markets enabling companies to raise capital and operate confidently are essential, so a registration system supporting this goal might be a boon to the industry.

George has a better-defined concept of the benefits of a licensing scheme. He believes It would increase the independence of the FRC, potentially allowing it to better discharge its duties. Additionally, it would boost cohesion and clarity in a system that currently plays host to myriad actors, each with different responsibilities and a web of interrelated obligations. The current “patchwork quilt” of parties overseeing public entity audit poses a real challenge for those that are regulated, with clarity the first victim.

Moreover, a licensing scheme could furnish the FRC with a “full range of proportionate sanctions”. The body has long complained that its only option for investigating problems is too high profile; the institutes must first consent and the resulting furore could sink a firm that might turn out to have done nothing wrong.

With a registration scheme, problems could be unearthed and ironed out sooner as part of the examination process, while conditions could be attached to licenses as a softer way of promoting good professional conduct.

There are those who say that adding an extra hoop for auditors to jump through would improve neither quality nor independence in public interest audit. One Big Four partner said firms’ burden of risk in audit is more than enough to ensure the right decisions are made when it comes to picking personnel. He said cases such as Arthur Anderson represent the Damocles’ sword of litigation and mean both independence and quality are of paramount importance in audit appointments.

Steve Maslin, head of policy at Grant Thornton, questioned whether a registration scheme would tie in with the FRC’s key responsibility of providing confidence to capital markets. He agreed that now is the time for the body to examine its powers and obligations but said there may be other ways of strengthening audit oversight.

For example, the FRC’s inspection work could be used to better inform institutes’ audit registration committees. Under the current system, these bodies grant and review licenses for firms using reports provided by the FRC’s Audit Inspection Unit. If the FRC were to provide clearer evidence of its concerns – plus guidance on what it sees as the best course of action – then it could boost the effectiveness of the existing scheme.

A licensing scheme is unlikely to be introduced in the near future. The FRC has neither the capacity nor – as it stands – the power to bring it in. Whether it has the mandate is open for debate and stakeholders are certain to want their say. Supporters claim that the time is ripe for a debate on licensing, though they acknowledge that, in the current anti-regulatory environment, segueing an extra layer of requirement is not going to be popular.

In the end, this issue might be the crux of the debate. If registering public entity auditors through the FRC succeeds in cutting a swathe through the complex supervisory environment, both firms and institutes could be persuaded. If, on the other hand, the tool is viewed as yet another red-tape hurdle, awkwardly pasted onto a system heavy with oversight, it is unlikely to get past the FRC’s boardroom.

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