John Selwood - Regulator fear in audit circles

How the audit profession is regulated obviously impacts on big business. Shareholders, financiers and other users of the accounts need to know that they can rely on the information that they receive; they need to be confident that the auditor is doing his job properly.

External regulation of the audit profession seems inevitable. The current regulatory regime may be effective, but self-regulation appears to many outsiders as self-serving and involving too many possible conflicts of interest.

In my view, the Joint Monitoring Unit does a good job, but from the client’s point of view, Chinese walls and other parts of the institute are no walls at all.

It is less clear, however, what small and medium-sized firms may feel they have to gain from the external regulation of audit work. Auditors here fear it because they do not believe that anybody outside the profession properly understands their work.

They are probably right: most SME clients have little understanding of what the audit is about.

Most small firms are now producing good audit work and this in large part is due to the fear factor created when the JMU was formed. SMEs have in fact always been doing good audit work; their problem has been in recording what was done to satisfy an external reviewer. So their clients have been getting high-quality work, regardless of the regulator.

It would be reasonable to suggest that an external regulator would make little difference in the quality of audit work that SMEs receive. Also, does the SME actually care about the quality of the audit?

It is usually an owner-managed company where the directors have day-to-day control over the business; the audit adds little value to their business.

The only change that they may see is an increase in the fee if firms are forced to do work to satisfy the new, and probably more aggressive, regulator.

The arguments for external regulation revolve wholly around the big firms and large listed companies. The main issues here are the lack of perceived independence of the current regulator by the users of accounts, and the trail of financial scandals where the finger of blame has been pointed at the auditor. Neither of these issues is relevant to the SME client.

Since the CharterGroup network of accountants was established 12 years ago, no member firm has had an audit-related negligence claim. But the main loser is the SME client. It has nothing to gain from a change in regulator and will probably have to pay higher audit fees.

So, what else? Perhaps it is up to individual firms to ensure the quality of what they do. In my experience, if a firm is committed to quality in all aspects of its work, then the technical compliance tends to look after itself. Firms that are customer-focused and demonstrate this via fast response times and clear user-friendly client communication always appear to do good work. This extends the definition of quality.

Neither the institute, nor the proposed government external regulator will have an interest in this aspect of quality. In future it may be left to certain firms or, more pertinently, other organisations servicing the SME sector, to establish their own quality standards and to police them. Knowing this is something that clients might take notice of.

John Selwood is head of the CharterGroup Partnership.