Bill could mean jail for innocent auditors

Innocent accountants could face prison sentences if the government fails to clarify proposed new laws on auditors’ responsibilities.

Link: Arthur Andersen conviction overturned

The government is expected to come under intense pressure as the profession lobbies for a change in the wording of the legislation once consultation closes on 10 June.

Representatives of the profession have expressed deepening concern over the language used in the company law reform white paper which proposes to make it a criminal offence to ‘knowingly or recklessly’ give ‘an incorrect audit opinion’.

Worries are growing over the use of key words in this statement, which, if not rectified, could have potentially devastating consequences for the industry and the individuals working in it.

‘The concern with the word “recklessly” is that it is almost a lower test than negligence,’ said Steve Maslin, head of assurance at Grant Thornton. ‘If left unchecked we could have criminal sanctions being levied against firms or partners merely because they made a mistake.’

The proposal, by including the word ‘knowingly’, may also expose auditors to sanctions, if things subsequently go wrong, argued Martyn Jones, national audit technical partner at Big Four firm Deloitte.

‘By the very act of doing a good audit and by recording what could go wrong fully, good auditors are put at high risk, when things subsequently go wrong,’ he said. If unchanged it could lead to defensive reporting from the profession, he added.

‘The word “incorrect” will need to be reconsidered,’ said John Davis, head of business law at ACCA. ‘It needs to be replaced with something more in keeping with the nature of the audit, which is an opinion, not a binding guarantee that everything is as it should be.’

The introduction of criminal sanctions in itself could severely impact on the profession, regardless of the wording, according to some.

‘Even the suggestion that an audit partner or audit firm could be subject to criminal sanctions could have very severe repercussions for the firm,’ said Grant Thornton’s Maslin, citing Andersen’s collapse as an example of the damage that can be done to reputations. Andersen folded after it was convicted of obstructing justice in June 2002, a ruling overturned this week by the Supreme Court.

Maslin also argued that the rules could be unfair on any partners involved, who may have to put their careers on hold for up to 10 years while justice takes its course. ‘There are enough tough things happening to the audit profession at the moment,’ he said. ‘We question the need for there to be a criminal offence.’

The department of trade was unavailable for comment.