Analysis: FRC's Haddrill at the Treasury select commmittee

The Financial Reporting Council’s new chief executive made his debut before
the Treasury Select committee yesterday and received a grilling on the issues
that are likely to dominate the FRC’s agenda in the coming year.

Committee members, looking into the role of audit and accounting in the
banking crisis, expressed concern that audit firms were beginning to ‘move back
into consultancy’.

Challenged by committee member Jim Cousins MP, Stephen Haddrill was pressed
to explain why some Big Four firms were affirming in public their desire to grow
their non-audit fees.

Cousins claimed KPMG had said it wanted to treble its consultancy fees to
£600m. Haddrill told Cousins that he assumed the firms would be seeking to grow
their non-audit fees in general, but would not be doing that with their audit
clients.

Cousins was persistent in his questioning of how the audit industry is
regulated. His biggest concern was the inflated fees and lack of transparency
over the work the Big Four undertook for their blue chip clients. Surely there
must be a way, he said, to force audit firms to publish the amounts they receive
for audit and non-audit work?

Haddrill, in a measured performance, conceded the current system of
differentiating between audit and non-audit did throw up “absurdities” – work on
interim accounts, for instance, is classed as non-audit – and said he would be
working with a range of bodies to clarify this.

He also said his organisation would be monitoring the ratios of audit to
non-audit fees.

Ian Patterson-Brown, convener of the ICAS Ethics Committee defended the
increases, claiming that consultancy fees always rise during recession as
businesses seek to cut costs and rationalise operations – for which they require
advice.

In response to criticism from several MPs on the size of the fees received by
the Big Four from banks in particular, Haddrill said that while it wasn’t his
job to defend audit firms, he did believe substantial fees were justified if
they were re-invested in training and staff development, in turn improving audit
quality. The FRC is expected to report on its findings on the audit market in
the next two months.

Following on from a similar hearing last year, this session covered a wide
range of topics including the issues of transparency and the lack of competition
in the market. Summing up, committee chairman John McFall asked the witnesses
what they thought had changed since the advent of the financial crisis in 2008.

Haddrill said he believed that boards were now focusing more on the issue of
risk management, and that international audit regulators were liaising on a more
regular basis in order to tackle the issues that the financial crisis and its
fallout has created.

Dr Steve Priddy, technical director of the ACCA and a last minute replacement
for the absent chief executive Helen Brand, said he was seeing a strengthening
of the role of audit committees in the wake of the Walker report on banking
corporate governance. Robert Hodgkinson, executive director, technical of the
ICAEW, meanwhile, defended the profession from criticism, claiming that the
banking crisis wasn’t a failure of auditors, but did concede that lessons had to
be learned about the impact of accounting decisions on the real economy.