Firm favourites: Cosying up to regulators

LAST WEEK’S Audit Inspection Unit reports threw light on work at the top six firms, and optimists said they showed slight improvement.

A sub-board of the Financial Reporting Council, the AIU said this year’s findings pointed to “as good, or even slightly better” audits, and institute members agreed they are “happy” with the results.

However, the AIU itself said it was hard to identify trends from such a small pool of reviews, suggesting celebrating ‘as good or better’ results – despite the number of unsatisfactory audits climbing – is a step too far.

Director Andrew Jones had ready excuses for the firms’ continuing weakness in certain areas. Their size and de-centralised structure made it hard to achieve root-and-branch improvement, he said, while in some cases, last year’s AIU recommendations had not yet filtered through to audits in the most recent review.

The ICAEW too was quick to offer explanations for shoddy audit work. Executive director of professional standards Vernon Soare described the problems as “isolated incidents” that are “not worrying” and “certainly not indicative of systematic or endemic failure”.

This is despite the fact that year in, year out, the top six struggle to dissect management claims with appropriate scepticism, and are universally pulled up on tricksy issues like fair value and goodwill impairment.

When the two prongs of industry supervision – institutes and the FRC – are lining up to pat firms on the back for their lacklustre audit reviews, stakeholders should be worried.

Oversight and retribution are currently shared between them, and a forthcoming FRC consultation could see even more power concentrated in institutes’ hands, as the Audit and Actuarial Disciplinary Board is considering offloading some of its responsibilities onto the ICAEW and its ilk.

When accused of a curious willingness to defend the firms, Jones said the AIU will not tolerate poor audit work, and is “holding firms’ feet to the fire by going back review their work”. He pointed out that the public reports are just the tip of a finger-wagging iceberg, and a much more detailed review is sent to the firm in question and its clients.

Vernon Soare displayed a similar confidence in audit inspectors, saying the body has been delegated power by the secretary of state and “has a serious job to do”. He argued overseers often struggle to demonstrate objectivity but nevertheless, it would not be in their interest to ‘find’ improvements without supporting evidence.

The recent Office of Fair Trading decision to refer audit to the Competition Commission gave institutes another chance to nail their colours to the mast. CIMA said the market is “currently competitive”, making the referral “arguably unnecessary under present circumstances”. The ICAEW and ICAS were similarly reticent, questioning whether the commission had the teeth to impose successful remedies.

With the rest of the profession lining up to demand greater competition and investors concerned about Big Four market capture, the reluctance of industry bodies to get behind the zeitgeist is telling.

Institutes need the big firms to put graduates through their training programmes – just ask the ICAEW, which lost Ernst & Young learners to ICAS in 2000, reducing its student count by around 400 a year. This could make them reluctant to go against firms’ best interests, and must make them think twice on touchy issues like competition.

The FRC too has been accused of regulatory capture, as it fills its boards with current and former members of the accounting elite. Accountancy Age recently reported on new appointments to the Financial Reporting Review Panel, of which a comfortable six in 13 came from the Big Four.

The plurality of institutes plus the FRC and its various boards are often cited as proof of thorough and overarching industry supervision. However, with top firms heavily over-represented on the regulatory scene and a complex web of funding and inter-dependence linking the various bodies, it is arguable that the pluralistic landscape is just variations on a theme, with no true independence or will to scrutinize problems.

Of course, top accountants make their way to firms’ highest echelons, and it is these minds that we want working on tough issues like audit standards and regulation. However, their value is arguably diminished when the institutes and FRC boards resemble an old boys knees-up, and we should bear this in mind when examining the trappings of regulatory oversight, of which the AIU is just one feature.

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