Auditors may escape rules shakeup of non-audit work

John Ormerod

An early consensus is emerging among responses to plans which could restrict
auditors from taking on non-audit work.

The submissions received so far suggest the profession has little to fear
from the Auditing Practices Board’s (APB) latest review of rules around
non-audit services.

Increased transparency but no further restrictions is a common theme among
submissions, which come from former regulators, academics and the Big Four.

The APB’s review of non-audit services grew out of the Treasury Select
Committee’s report into the banking crisis.

It was feared a firm’s independence could be undermined by substantial
revenue received from non-audit work undertaken for an audit client.

At the time, the committee was clear in its view: “We strongly believe that
investor confidence and trust in audit would be enhanced by a prohibition on
audit firms conducting non-audit work for the same company, and recommend that
the Financial Reporting Council (FRC) consult on this proposal at the earliest

The strong language convinced some in the audit industry that more
restrictions were on the agenda.

However, respondents so far have adopted a softer tone, calling for more
transparency but no out-right restrictions.

Sir David Clementi, former deputy governor of the Bank of England, wants
firms to reveal the names of partners involved in audit work but said: “I
believe it would severely reduce choice if the existing auditor could not
compete for this work.”

John Ormerod, former managing partner of Andersen UK, which imploded in the
wake of the Enron collapse, said there should be more information about the
nature of non-audit work. “It is in the nature of the service, more often than
the level of the fee, that may challenge auditor’s independence,” he said.

The ICAEW said there should be more clarity “on where the audit finishes and
non-audit services start”.

John Connolly, head of Deloitte’s UK operations, said existing measures are
well understood and practiced. “Further restrictions will reduce the choice
available to companies, increase their costs and may be detrimental to audit

A quick glance at the statistics shows non-audit revenue received by firms
from their audit clients has steadily fallen since the Enron scandal in 2001.
The most recent figures, based on 2009 numbers, show non-audit fees make up
about half of the total audit fee.

However, private companies tell a different story A report into Deloitte’s
audit of collapsed British car-maker MG Rover found the firm’s ratio of
non-audit to audit revenue was 15:1.

Marianne Ojo, an academic with the ACCA and the Center for European Law and
Politics, was one of few who said that perception has an impact on investor

“Where the fees generated from such non-audit services are considerably
high… and insufficient safeguards exist to protect the auditor’s
independence,” she said.

The FRC will consider the feedback and come up with recommendations later in
the year. Changes are likely to be implemented in the next 12 months.

Further reading:

to APB’s consultation

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