Audit reform may lead to major disruption

Paul Boyle, stepping down at FRC

Paul Boyle, stepping down at FRC

A recommendation by MPs for a blanket ban on audit firms selling non-audit
services to clients could cause major disruption to companies and their
auditors, the head of the UK’s accounting watchdog has warned.

Paul Boyle, chief executive of the
Financial Reporting
, said that it plans to begin a consultation on the subject this
summer, after a report by the Treasury committee called for a ban on auditors
providing non-audit services, such as tax or IT consultancy, to clients.

‘A complete ban on non-audit services would be a dramatic change from where
we are now,’ Boyle told Accountancy Age. ‘If this ban is imposed an
audit firm has a question to answer. Either it resigns from the audit and seeks
to carry on providing non-audit services, or does it [the audit firm] resign
from non-audit services and carry on with the audit?’

Critics of the audit industry have long claimed that the sale of advisory
services to audit clients poses a conflict of interest and undermines the
independence of the auditor.

The big audit firms claimed to have sorted the problem earlier this decade by
selling their consultancy arms in the wake of the Enron scandal.

But in the Treasury committee’s final report into the banking crisis, which
was published last week and examined the role of auditors, MPs reignited the
debate about the issue. They said: ‘We strongly believe that investor confidence
and trust in audit would be enhanced by a prohibition on audit firms conducting
non-audit work for the same company and recommend that the Financial Reporting
Council consult on this proposal at the earliest opportunity.’

Boyle, who is due to resign from the FRC after his successor takes over in
November, stressed that the FRC had an open mind on the issue. He added that
that any change in restrictions on non-advisory services would have to be phased
in to avoid unnecessary disruption, as companies could be forced to switch their
auditor or business adviser.

‘If you ban non-audit services you would literally have hundreds of
non-independent audit firms, so you can’t do this overnight.’

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