Boards to lose audit selection

It has emerged that the profession’s new regulator, the Accountancy Foundation, is considering ending perceived conflicts of interest by following the public sector model of having auditors chosen by a separate appointments board.

In the wake of the Enron scandal, numerous ideas have been batted around on how to end the perception that external auditors ‘overlook’ certain ill-judged accounting practices as part of an effort to sell on more lucrative non-audit services to clients.

But the Foundation’s Review Board is now working closely with the six professional bodies to weigh up benefits and the feasibility of establishing a similar body to the Audit Commission, which appoints auditors in the public sector.

Through a tendering process the state-run Audit Commission appoints external auditors to audit the financial statements of local authorities, health authorities, trusts, police, fire authorities and national parks authorities. The Commission normally appoints auditors initially for five years.

Statutory rotation of audit firms, or that of audit partners, have been the two most popular ideas among regulators and stakeholders to deal with perceived conflicts between auditors and their clients.

Opposition to the proposal is already mounting. Richard Baron, deputy head of policy at the Institute of Directors, said: ‘The main problem is it will be a distortion of the market. If you know you’ve got the job you won’t be competing on fees. It may start to lose value for money.’ He also questioned the basis on which a board would select external auditors.

Rodger Hughes, PwC senior audit partner also expressed early scepticism. ‘I don’t see a pressing need to change the status quo. Taking the appointment of auditors away from shareholders would be a huge change in the way auditing is run in this country,’ he said.

Colin Reeves, head of the Review Board, confirmed it was looking at the issue with the six accountancy bodies.

Details of the proposals or a date for the consultation to begin have not been set. The Treasury, Department of Trade and Industry, and Treasury select committee have launched reviews of the profession to gauge whether lessons learnt from the collapse of Enron can be applied to the UK.

Related reading