Auditors get recession warning

The UK’s audit watchdog is to issue a spring warning to auditors to be on alert for company directors manipulating accounts amid fears the country is plunging into economic slowdown.

Concerns have arisen that ‘aggressive earnings management’ – manipulation of the books – could hit UK businesses as fears mount, along with anxiety in the US that a downturn is around the corner.

Jon Grant, technical director of the Auditing Practices Board, said: ‘A slowdown in the economy could lead to directors using accounting devices to make their profits look better. Auditors should be vigilant in looking out for warning signs.’

He is not the only audit expert with fears about the rise in accounting irregularities in times of economic slowdown. Gerry Acher, KPMG partner and head of the ICAEW’s audit faculty, said: ‘It is vital that (auditors) exercise their judgement and foresight or we could find ourselves in the same mess as during the last recession.’

But Acher seemed confident that accounting standards are now ‘tighter’ and will protect against the recurrence of the accounting abuses of the early 1990s.

Martyn Jones, Deloitte & Touche technical partner, distanced himself from gloom-and-doom projections, like others including mobile phone operator Orange, which confirmed this week it is to float on the Paris and London stock exchanges. Jones urged both management and auditors to ‘challenge the assumptions underpinning key accounting estimates’.

‘In some ways the harder areas will be the interims. Review work will be less likely to get to the part that audits do,’ said Jones.

The APB bulletin, to be issued in the spring, encourages auditors to identify areas in advance where directors could manipulate profits, such as revenue recognition and provisions.

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