FSA wants auditors under the cosh
There’s no easy way to put it. The discussion paper published this morning by the Financial Services Authority and Financial Reporting Council will make for uncomfortable reading.
We know the regulators were spooked by the financial crisis and a firm repsonses was required, but the FSA has today proposed some sweeping new powers over auditors of listed institutions.
Chief among them are the ability to censure, fine or disqualify an auditor if they are viewed as having failed on the job.
The irony in this is that the paper is called ‘Enhancing the auditor’s role in prudential regulation’.
In truth it seems more about enhancing the regulators’ ability to punish auditors if they go astray. This apparently is about creating the right ‘incentives’ for auditors.
But if you are wondering where that comes from just look at the language used in the paper. It says the FSA and FRC believe “auditors need to challenge management more”, that the FSA has “questioned whether the auditor has always been sufficiently sceptical and has paid adequate attention to indicators of management bias.” Most scathing of all is the FSA belief that “the auditor sometimes portrays a worrying lack of scepticism”.
For all those auditors out there who believed that they had a “good crisis” the comments will come as a body blow. Suddenly the UK’s chief financial regulator has its doubt that auditors are standing up to be counted and it has the auditors in its sights for change.
Auditors have always had their detractors and critics but this time the lashing will feel much more severe.
Usually at this point the counter argument would begin. The lobbying, the dinners and quiet conversations, the whispers in the ears of senior officials and even politicians would get under way. But in this climate? And against a body stung by the criticism of its own role in failing during the credit crunch?
The argument would be that it is “audit” not “auditors” that needs to be examined. The FSA’s scathing views will make that much more difficult. The emphasis appears to be definitely on behaviour, not on the structure of audit. That will be hard to take.