Firms keep their heads down; institutes rattle their chains

STAKEHOLDER REACTIONS following the government response to the Lords’ audit report illustrate the tension of an industry in the grip of constant evaluation and reform.

Auditors: Market concentration and their role is just one in a smorgasbord of reports examining the industry in the wake of the credit crisis. It is the little brother of the European Commission’s investigation, headed by the dreaded Michel Barnier, and cousin to various papers by the Financial Reporting Council (FRC), the Department for Business, Innovation and Skills (BIS), the institutes and others.

Against this backdrop, stakeholders used the government’s response to the Lords’ report as a cue to consolidate their well-worn positions – in the case of the firms – or to dust off their soapbox, as with the institutes.

Deloitte and Ernst & Young were quick to reiterate their support for ‘positive changes’ and enhanced audit quality, saying they back measures that fit with these aims. E&Y plumped for a stronger role for the audit committee in auditor appointments and the removal of restrictive banking covenants – neither of which are groundbreaking – while Deloitte confined themselves to contingency planning and “contributing positively” to the ongoing reviews of audit quality. No word yet from PwC or KPMG.

Mid-tier firms BDO and Grant Thornton welcomed government support for the Office of Fair Trading investigation, and neither was shocked at the government’s failure to back calls for mandatory dialogue between bank regulators and auditors.

The assertion that the Financial Service Authority’s Code of Practice is enough to be going on with rang true for both; BDO senior partner James Roberts said the need for better communication is widely accepted since the credit crisis, and pointed to agreements already in place that negate the need for legislative change.

For the institutes, the response was a chance to pull issues from the rambling report that resonate with their particular crusades. ICAS called for companies to publicly disclose their retendering policy on a comply-or-explain basis, saying government comments on transparency (that it should improve with time) did not go far enough.

ACCA’s response was the most extensive, and noteworthy in that it was the only one to support to the Lords’ call for mandatory dialogue between bank regulators and auditors. It warned that the committee may be proved right in its fears that significant improvements in this area will not be forthcoming, forcing a stronger legislative hand.

Meanwhile, the ICAEW leapt on the response as further proof that “auditors should not be singled out and blamed for the banking crisis”. It agreed with peers that the government was correct to dismiss claims of a lack of prudence in International Financial Reporting Standards, and reiterated that the principle purpose of annual accounts is to provide transparent information for investors.

Stakeholders may have their eyes fixed on bigger issues. The Lords’ audit report came out in March and its contents have been thoroughly digested. The most significant outcome was the OFT investigation, currently under way, but this summer will also see work by BIS on narrative reporting, institute examinations of financial reports, further FRC study on effective company stewardship and of course, the build up to Barnier’s conclusions.

For this reason, it is little wonder the battle-weary Big Four are trotting out their pat responses, the second-tier are crowing over the OFT inquiry and the institutes are choosing their words carefully – they are all gearing up for the next six months of struggle.

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