EC embroiled in audit qualification row

Link: UK may oppose EC cap policy

Jules Muis, head of internal audit at the European Commission, called for ‘qualifications’ to the auditor’s report to be made public but his views have met with fierce condemnation.

David Nish, Scottish Power’s FD, reacted strongly by saying the remarks ‘show a lack of understanding of what the audit is about’.

At an ICAEW conference in Brussels last month, Muis said qualifications should be ‘the norm not the exception’. Currently, only the National Audit Office issues qualifications after examining the accounts of government departments.

According to Nish, the principle of ‘true and fair’ meant that auditors and finance teams made an assessment based on an understanding of the company’s accounts.

The FTSE-100 FD said his own company had constructed a tightly controlled environment in which transactions were checked down to the lowest levels of management.

He said he trusted the system of controls already in place, adding that he and chief executive Ian Russell had been among the first company directors to sign the notorious ‘oath of honesty’ required for their accounts by the US Securities and Exchange Commission.

At the ICAEW conference, Muis said that the routine use of public qualifications could be a key to preventing accounting scandals.

He said: ‘We have to restore the dignity of qualified opinion.’ He added that having an absolutely clean audit, with no mistakes in the accounts, was extremely difficult and that qualifications should be used to ‘build a risk profile’ of the audit.

Paul Druckman, vice president of the ICAEW, who was also participating in the conference, agreed with Muis’ opinion.

Any such move would prove difficult because companies, as David Nish indicated, are unlikely to agree to it. There is already concern that Europe appears to be setting itself on a collision course with UK auditors over the use of audit disclaimers and a cap on auditors’ liabilities.

Last week in London, Frits Bolkestein, European commissioner for competition, attempted to undermine plans for a liability cap in the UK by stating that he felt unlimited liability was a ‘quality driver’ and that ending it would damage efforts to restore investor confidence.

Since Enron and WorldCom, the UK government has gone through a detailed review of regulation for auditors and accountants – but none of the proposals announced so far have addressed the form of the audit report.

However, the government has indicated a desire to see auditors of large public companies publish their own annual report and accounts. The government said this should be a voluntary measure, though it might consider legislation if there are only a few reports published.