Manifesto: view from the front bench

PATRICIA HEWITT, Trade and industry secretary

We plan to ensure that there is a careful review of the UK’s current regulatory practices for statutory audit and financial reporting, following the collapse of Enron in the US.

The requirements in the UK are significantly different from the US in relation both to the relevant accounting standards and to the oversight and regulation of the audit profession. But it would be most unwise to conclude that problems of this sort could not arise in the UK; and it is right therefore to review arrangements carefully.

I am therefore setting up a group jointly with the Treasury, and including the Financial Services Authority and other regulators such as the Accountancy Foundation, to oversee and co-ordinate the response in the UK to these issues raised by the collapse of Enron. These include:

1. Whether the ethical standards of the professional audit bodies provide an adequate assurance on the independence of auditors and including the restrictions on the supply of non-auditors and non-audit services.

2. Whether there should be a requirement for the mandatory rotation of audit firms; or for the mandatory retendering of company audits.

3. Whether current disclosures of audit and non audit fees in company accounts are adequate.

4. The role of audit committees in relation to the audit engagement.

5. The implications for accounting and auditing standards in the UK.

The group will report on progress and emerging conclusions by the summer.

At the same time I am also setting up an independent review of the role and effectiveness of non-executive directors in the UK. The review will report jointly to me and the chancellor of the exchequer. I will provide further details of who is to lead the review and the terms of reference in due course.

Together these reviews are aimed at:

1. Ensuring that companies can fulfil their potential and improve productivity.

2. Strengthening the UK’s framework for how companies operate.

3. Encouraging greater transparency.

The quality assurance systems for the statutory audit, both within and outside the audit firms, are an important part of the regulatory arrangements which give confidence in the audit process.

The European Commission’s Recommendation C(2000) 3304 of 15 November 2000 on ‘quality assurance for the statutory audit in the EU: minimum requirements’ recommends that all persons carrying out statutory audits should be subject to a quality assurance system. The Recommendation sets out acceptable methodologies and covers topics such as review cycles, the scope of the review and the quality of the reviewer.

The United Kingdom has an established system of monitoring of statutory company auditors, which was in place well before the recommendation was adopted. The bodies recognised under the Companies Act 1989 to supervise registered auditors are required regularly to monitor the performance of audit firms or individual auditors registered with them. My department asked the recognised supervisory bodies to review existing requirements against the detail of the recommendation and to report the results.

The arrangements were found to be broadly in line with the recommendation.

All audit firms and individual auditors are subject to regular review, including monitoring visits by independent reviewers, and those with public interest clients, such as listed companies, are subject to a higher frequency of coverage.

GEORGE W BUSH – President of the Unites States of America

Reform should begin with accountability, and reform should start at the top. The chief executive officer has a daily duty to oversee the entire enterprise, the entire firm, and therefore, bears a unique responsibility for serving shareholder interests.

Currently, a CEO signs a nominal certification of annual financial statements, and does so merely in its capacity on behalf of the company. In the future, the CEO’s signature should also be his personal certification, vouching for the voracity and fairness of the financial disclosures.

Oftentimes businesses base executive bonuses on financial statements.

If a financial statement turns out to be grossly inaccurate, or the result of serious misconduct, those bonuses should be returned to the company’s treasury on behalf of it’s shareholders.

Corporate officers should not be allowed to secretly trade their company’s stock. Every time they buy or sell, they should be required to tell the public within two days.

And to further ensure that information is reliable, we will need reforms within the accounting profession. Auditors are a critical external check on management, and we must ensure that the integrity of their work is never compromised. Accounting is one of the most and one of the most respected professions in our country, and it can help protect its own integrity by developing and enforcing clear standards of conduct.

The profession also needs an independent regulatory board to hold accounting firms to the highest ethical standards. And the SEC should exercise more effective and broad oversight of accounting standards.

And, finally, auditors should do more than evaluate a company by minimum standards. Instead, the auditors should compare the company’s financial controls to the best industry practices and give those findings to the audit committee.

– This is an edited extract of a speech given by President Bush on 7 March at the at Malcolm Baldrige National Quality Award Ceremony in Washington.

VINCENT CABLE – Liberal democrat trade and industry spokesman

I found your list of proposed reforms very helpful and reacted positively, though some of them seem more relevant to the profession itself than the public policy debate which I am engaged in.

I should say that Lord Sharman, whom you quote favourably, is part of my parliamentary DTI team and I have consulted him extensively on the issues. I should add that another parliamentary colleague, Edward Davey MP, though like me an economist rather than an accountant, has a close interest in these issues primarily from the standpoint of tax policy.

In terms of specifics.

1. The retendering/ independence proposals are central and well made. I was closely involved in the Equitable Life debate and Ernst & Young is compromised by its relationship with Equitable and may, indeed, face litigation as a consequence.

2. On the separation of audit and consultancy, I would go further. The role of the Big Five in combining both receivership and auditing functions has created some potentially serious conflicts of interest on which I have written to Patricia Hewitt (eg Cammell Laird).

3. The political ‘hot potato’ of directors’ remuneration is handled very well. I think we can all agree in the virtues of transparency; and this is much better approach than the populist approach of regulating remuneration.

But it would be naive to believe that more transparency will make the issue go away. Indeed, as the prime minister has discovered after introducing transparency into political donations, more disclosure of information can whet the appetite for scandal rather than diminish it.

4. The reference of the National Audit Office is helpful. Its powers should be in the appointment of auditors, not just for companies in receipt of public funding.

5. Late payment. Name and shame approach welcome.

6. Mandatory social reporting. I am surprised to see the profession advocating this. Certainly a spread of meaningful social accounting would be welcome but we need to be careful of this becoming a highly prescriptive and bureaucratic exercise.

MICHAEL HOWARD – Shadow chancellor of the exchequer

I am grateful for the copy of Accountancy Age with highlighted article on your ten proposals to bolster the profession following the collapse of Enron. I will consider your views, and those of Sir Peter Kemp, with care.

We have recently embarked on a comprehensive review of our policies and I have commissioned a report from a committee of the Centre of Policy Studies under Lord Young. This is not dissimilar to your tenth proposal for the tax committee for a Tax Practice Committee. As in your proposal, Lord Young’s committee of tax experts is looking to simplify the ridiculously complicated minefield that the tax system has become.



In the wake of the Enron scandal some suggest the answer is the mandatory rotation of auditors and banning the selling of non-audit services to audit clients. At the very least companies should be compelled to retender their audit regularly. And while all non-audit services present a significant risk to independence, in some cases non-audit projects, for audit clients, achieve a scale so vast they pose real problems.


The entire FTSE-100 is audited by the Big Five and if it all goes wrong and a company collapses, it’s likely that another Big Five firm will be called in. To avoid Big Five firms endlessly chasing each other through the courts, those making claims against auditors need an independent body to rate damage and issue an order to pay a charge.


Publishing the full auditors’ report is out of the question, given that it contains commercially sensitive information. But more information could be published that would increase transparency and aid shareholders’ decision-making – without threatening a company’s commercial standing.


Listed companies must publish annual reports and accounts for shareholders and stakeholders to view – but auditors don’t have to. Both KPMG and Ernst & Young have led the way in this area by publishing their accounts for some time now. Auditors for publicly quoted companies must publish their own annual reports.


Salaries of chairmen and chief executives are published with those of other directors published in bands. Remuneration of directors of all UK-listed companies should be published in full. And large bonuses should be justified in the annual report. The remuneration committee may need to be widened.


The Sharman report published last year advocated widening the National Audit Office powers to allow it to investigate private companies receiving public money. It also said 25% of the NAO’s work could be outsourced to the private sector – in the short term this would solve the resource issue were the NAO’s remit to be widened. To increase transparency, there is no reason why the Audit Commission should be left out of this arrangement.


1998 saw the government introduce legislation that allows companies to charge interest on unpaid bills, but this has barely scratched the surface of the problem. Maybe companies should in their annual reports publish a list of ‘bad’ debtors and amounts they owe.


Raising the audit exemption threshold to the European maximum of #4.8m would free around 725,000 UK businesses from the burden of annual statutory audit. Debate should focus on when, not whether, to take the step.


Forcing companies to publicise their ‘social’ performance will compel them to do better. Complaints that measures are unavailable to ensure it would be fair are increasingly spurious. Compulsion is the only way forward.


The tax system is complex. Efforts have been made to make it easier to understand but that ducks the real issue. A special committee made of experts, politicians and stakeholders could view proposals in terms of their potential to limit administrative burdens and test compatibility with existing legislation.

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