Institute of Directors
A recommendation by MPs for a blanket ban on bank auditors selling
consultancy services to clients has been welcomed by a leading business group
and a corporate governance advisory body but has been dismissed as ‘silly’ by a
former finance director.
The Institute of Directors said public confidence in the audit industry could
be boosted by audit firms becoming less reliant on non-audit services for
‘[Non-audit fees] are averaging four times the audit fee for the top FTSE 100
clients,’ the IOD said earlier this year in response to a consultation paper by
the Audit Firm Governance Working Group. ‘Best practice should dictate that
clients should not pay more in audit fees to their auditor than they pay for
Last month, the Treasury select committee’s final report into the banking
crisis said a ban on the sale of non-audit services to bank audit clients could
boost investor trust in the audit process. Most of the big audit firms claimed
to have sorted the problem earlier this decade by selling their consultancy arms
in the wake of the Enron scandal.
Last week Paul Boyle, chief executive of the Financial Reporting Council,
warned that a ban on consultancy services could cause major disruption to
companies and their auditors, as firms could be forced to switch their auditor
or business adviser.
Critics of the audit industry have long claimed that the sale of IT and tax
advisory services to clients poses a conflict of interest and undermines auditor
Pirc, the shareholder advisory body, said: ‘We firmly believe that these
other commercial interests will compromise the auditors in their ability to
confront directors on difficult issues. As a general principle, we consider that
other professionals should undertake all non-audit work and would wish to see a
prohibition on non-audit services being provided by the auditor.’
However, Eric Tracey, a former FD of companies including Amey, the support
services company, said the Treasury committee’s proposal was a ‘very silly
Tracey, a former partner at Deloitte & Touche and now senior
non-executive director at Chloride Group, the power systems supplier, said
listed companies use internal audit committees to decide which advisory services
auditors can sell to their clients.
‘Audit committees will normally ban services such as tax planning and
internal audit and IT services but it may be OK for an auditor to provide
services such as due diligence,’ he said. He added that a blanket ban on
auditors providing advisory services would ‘effectively weaken’ firms and
undermine their independence’.
Among the mid-tier accounting firms, however, there is some support for a ban
on audit firms selling advisory services, according to a very senior source in
But the head of one mid-tier firm said external regulation of bank audits was
needed to help restore public confidence in the process.
Bank auditors should have to demonstrate sufficient knowledge and experience
to a regulator, such as the FSA or a government department such as the
Department for Business Enterprise & Regulatory Reforms, the source said.
‘The problems come when the auditor does not understand what it is auditing.’