The lessons from the Maxwell debacle have long since been learnt in terms of pensions regulation, directors’ responsibilities and the fundamental issue of the suitability of management as directors of a listed company.
But the recommendation made by the DTI inspectors’ report into the Maxwell affair – that ‘auditors should be discouraged from acting as reporting accountants’ – is on the wrong track.
First, the recommendation is not consistent with any other proposals on regulation of accountancy firms. The US Securities & Exchange Commission’s revised rules on restricting the services accountancy firms provide do not include the notion that the auditors should be excluded from the initial public offering process, even taking into account differences between the US and the UK in the role of accountants in an IPO. Similarly, the EU’s proposals on auditor regulation make no reference to this.
When almost all IPOs have an international element, we should be harmonising practice on IPOs to make the process more useful for companies seeking international investors. The recommendation is at odds with the development of international practice.
Second, barring auditors from acting as reporting accountants would be a case of regulation imposing a burden of additional work and potentially additional cost on all companies seeking to access capital markets to compensate for the particular deficiencies of one company 10 years ago.
Building on their cumulative knowledge means that auditors acting as reporting accountants will take up less management time in their investigations than reporting accountants from a different firm. The IPO process already imposes onerous time commitments on management. We should avoid adding to this unless it is clear that substantial benefits will be achieved.
Third, the recommendation is based on a mistaken presumption. It implies that, by definition, auditors lack independence, an assumption auditors vigorously contest. This ignores increasing safeguards, not least the requirement, effective since 1997, that a partner other than the audit partner is involved in the conduct of work as reporting accountants.
There is little to suggest that the current regime is working against the interest of the public or the market. It should remain.
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