PracticeConsultingUS ‘disease’ to cross Atlantic

US 'disease' to cross Atlantic

The Auditing Practices Board today sent a 'warning shot' to auditors and management to beware of the 'nasty American disease' of 'wrong accounting' that is soon to cross the Atlantic.

With the publication of consultation paper today, the APB hopes it will bring the issue of ‘aggressive earnings management’, which it alternatively described as ‘wrong accounting’, to the forefront in a profession that is inevitably at the receiving end of corporate scandals.

Ian Plaistowe, APB chairman, said: ‘There are clear signs that the American disease is coming over to the UK.

‘In the United States, 464 sets of financial statements have had to be restated in the last three years; usually due to aggressive earnings management. That is more than twice the level of previous seven years.’

Wrong accounting, explained Plaistowe, is a result of economic and commercial pressures on directors. These pressures include tactics to stretch company earnings to match market expectations and to understate profits to reduce tax liabilities. Changes in top level remuneration packages are also a factor. Directors’ and management incomes are increasingly linked to results.

The paper is also intended to encourage increased collaboration between the APB and the Accounting Standards Board as well as other organisations, such as the Financial Services Authority.

Auditors are increasingly frustrated that in times of economic downturn blame is singularly laid on the auditing profession. And with reports this morning that the US may have already slipped into its first recession in a decade, it could lead to another round of attacks on the profession.

‘This is not an auditing problem. Primarily it is a problem for directors and management,’ warned Plaistowe.

The consultation paper describes the problem and how it develops and asks respondents to say whether there is enough guidance in this area and if more industry bodies should become involved in clamping down on the problem. The consultation deadline is 30 September 2001.

A revised standard SAS 610 ‘Communication of audit matters to those charged with governance’ was also issued today. The revised version takes a deeper look at the independence of auditors and what an auditor is expected to report when the audit process is completed.

The APB also plans to issue a companion paper to SAS 610 designed to aid non-executive directors.

Links

www.asb.org.uk

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