Auditors may escape criminal sanctions

The government has reluctantly agreed to consider dropping a criminal
sanction against accountants in the company law reform bill after protests in
the House of Lords that it will lead to a huge increase in audit work.

Concerns expressed by the ICAEW prompted objections from peers of all
parties. Government spokesman Lord McKenzie of Luton insisted that no
fundamental changes to auditors’ duties would be caused by the bill, but
promised he would ‘consider whether anything further needs to be done’ at a
later stage in the bill’s passage. He added: ‘I have registered the strength of
feeling on this matter.’

Former KPMG partner Baroness Noakes pressed for the government to align the
directors’ responsibility to keep ‘adequate’ accounts with the auditors.

She said the ICAEW believed that, unless the term ‘accounting records’ was
tied to the production of true and fair accounts, ‘auditors will be driven down
a route of 100% testing of immaterial systems and transactions which will be
both costly and ineffective’.

The small and medium-sized company sector with relatively informal records
would otherwise end up with ‘a lot of qualified reports’ as risk-averse
accountants sought to put themselves beyond criminal penalties, she said. ‘They
need to ensure that what they do is as close to being bomb-proof as possible,’
she said.

Baroness Goudie, a strategic management consultant and Labour peer, said the
legislation ‘may result in significant increases in detailed transaction testing
by auditors to avoid the risk of criminal prosecution’, and generate
Sarbanes-Oxley style additional costs and box-ticking.

Liberal Democrat Lord Sharman, also a former KPMG partner, said the duty of
auditors was to audit the accounts and they produced reliable numbers, not to
audit every aspect of a company.

An Ernst & Young spokesman said: ‘We have significant concerns regarding
the clauses as currently drafted, not least that the proposed offence will
inevitably lead to defensive auditing, which is not in the interests of the
profession or clients.

‘A real improvement would be to ensure the offence punishes only dishonest
conduct,’ he said.

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