The issues surrounding the statutory audit have seldom been the cause of such intense interest across two continents at the same time. But globalisation, the Internet, company scandals and the rapid movement of capital across the world have turned the spotlight on audit, and in turn, the audit firms that sign off accounts. Every year brings its own corporate failures, and in the first month of the new year, two high-profile companies – TransTec and Versailles – have already filled the newspapers with stories of accounting irregularities. But behind the headlines, companies such as the newly merged Glaxo SmithKline are demanding harmonisation across the world as they spread their wings into new territories while the Internet is empowering shareholders more than ever to access instant financial information. Moving to new markets And as information speeds up, so the globe’s capital can move rapidly to new markets. And the recent crash of the East Asian economy highlighted only too clearly that capital will go to the area of greatest return even when the financial stability of the market is in serious doubt. In East Asia, billions of pounds were lost as markets spiralled out of control and many of the companies who went bust had had their accounts signed off by a Big Five firm. Although it would be impossible today to demand that the Big Five ignored national standards in favour of tighter rules, the global players of the world, and the increasingly global economy, are demanding more rigorous audits. The US Securities and Exchange Commission has had its eye on Big Five firms for some time in its role as regulator of companies listed on the New York Stock Exchange. Last month’s report into the shareholdings of PricewaterhouseCoopers staff found an embarrassing number of breaches of independence rules, as both partners and employees had invested in the shares of audit clients. But this is far from the end of the story. Over the next few months, the SEC-backed Panel on Audit Effectiveness, due to report in April, will finalise its review on the effectiveness of audits. A growing concern The panel was created in response to a growing concern that the accounting profession should critically examine issues that may have led to a deterioration in the effectiveness of audits, and its findings could prove extremely damaging to the audit profession – both in the US, and around the world through the SEC’s membership of international securities body, IOSCO. Yet the focus on audit is not limited to the US alone. Last week saw the launch of an Auditing Practices Board revised exposure draft to SAS 240, on quality control for audit work. The draft considers the role of the firm, the audit engagement partner and monitoring, but a key extension of the revised standard is for independent reviews to be undertaken of all listed company audits before the reports are issued. This is a major shift for firms, particularly smaller ones as the biggest firms already have procedures in place to allow independent staff who are not connected with either the client, or the audit, to review audit reports. Lew Hughes, assistant auditor general at the National Audit Office who chaired the SAS 240 working group said: ‘A review of substance whereby an experienced partner reconsiders the audit teams’ judgements on such matters as objectivity and the independence of the firm, the rigour of the planning process and the appropriateness of the draft audit report would underpin existing practice in some firms but would be a significant step forward for others.’ APB technical director Jon Grant says that the paper also touches on the sensitive issue of independence, and in a similar vein to the ethical guidelines to firms accepting receivership appointments, firms will be required to consider and document their independence. ‘Audit engagement partners will have to sit down annually and summarise the situation as to why there are no conflicts,’ he said. Changes through new rules The role of the audit engagement partner is significant under the new rules, which dictate that such a person should be appointed to each audit undertaken by a firm and take responsibility for the audit on the behalf of their employer. Hughes is well aware that the move towards tightening up on audit is an international crusade, but he maintains that the new SAS 240, which was 18 months in the making, will put Britain ahead of the rest of the world. The new standard may also provide an important benchmark for work taking place at European level towards harmonising auditing standards throughout the member states. The EU is on the verge of publishing a recommendation on the quality of audit in practice. It will look at compliance with national standards and how much the work respects ethical rules with regard to independence. ‘There is always room for improvement and we want to ensure that statutory audit is carried out in conformity with the auditing standards,’ said an official.
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