Audit watchdog moves to close consultancy services loophole

Accounting firms will face tougher restrictions on selling advisory work to
audit clients, but some partners may be able to work with a large client for up
to seven years, under new proposals from the Auditing Practices Board.

The auditing watchdog has announced the possible changes in a consultation
aimed at updating ethical standards for auditors.

One proposed change is a clarification in the rules for when partners
involved in an audit can sell advisory or consulting work to the same client.

Current APB ethical standards only prohibit key people in a firm’s audit team
from being rewarded for selling advisory or consulting services to their audit
client. The APB standards do not refer to staff outside the audit team, such as
tax partners, who may also play a key role in the audit, and sell advisory
services to the audit client.

This loophole in ethical standards was highlighted in a report last December
by the Audit Inspection Unit.

The AIU report, which reviewed the UK’s seven biggest auditors, found that
PricewaterhouseCoopers may have breached ethical standards after tax partners
involved in a client’s audit were rewarded for selling non-audit services to the
same audit client.

The AIU report reignited a debate about the independence of auditors and a
blurring of the lines between audit and consultancy businesses within big
accounting firms.

The APB consultation document has proposed that ‘key partners’ outside the
audit team who have a significant role in an audit should be prohibited from
selling advisory services to the same client.

The APB has also said that is it considering extending this proposed ban to
cover other partners and staff in a firm even if they play only a minor role in
an audit.

In response to the APB consultation, Richard Sexton, UK head of assurance at
PwC
said: ‘In our public response to the AIU report we reiterated that we follow
auditing and ethical standards and observe the principles involved.’

‘We reached this view after very careful consideration of the AIU’s position.
In addition, we stated that where the AIU believed that our interpretation of
standards was not consistent with theirs, further guidance from the APB was
needed. We therefore welcome this move by the APB to clarify the rules.’

Elsewhere in its consultation, the APB has proposed a relaxation of audit
rotation rules by allowing the ‘audit engagement partner’ to stay at a large
listed client for seven years before moving to a new client, rather than after
five years under current rules.

The APB has suggested that the five-year rotation rule should ‘remain the
norm’, but for large and complex clients, the company’s audit committee should
be allowed to request that the lead audit partner stays on the contract for two
more years, to help improve the audit quality.

Any extension of the audit would have to be announced in the company’s
accounts.
Further reading:

APB
issues a Consultation Paper and Exposure Draft of Amendments to Ethical
Standards for Auditors