AUDITORS will be stopped from providing unlimited restructuring assistance to their audit clients under new rules aimed at toughening independence criteria in the wake of the crisis.
The rules, however, have stopped short of an outright ban on listed-company auditors undertaking non-audit services for their clients – a measure recommended by a treasury committee last year.
The Auditing Practices Board (APB), which devised the rules due for release later in the week, will ban auditors from offering detailed restructuring guidance which they may later have to examine as part of their audit.
Auditors will instead be allowed to offer preliminary, general restructuring help, and also challenge restructuring plans, in particular circumstances.
The APB wants to stop auditors from providing detailed help to their financially distressed clients, which they may then have to objectively review. But, in the process, the APB rules may limit the fee revenue auditor’s receive from restructuring work.
Auditors are often the first contact point for companies in distress and are considered well placed to refer work to other departments within their firms. Investors, however, fear auditors may have their independence compromised if they have to pass judgment on work completed by others within their own firm.
Marek Grabowski, executive director with the APB, said the rules strike the right balance.
“It addresses the fundamental issue but respects the concerns that were expressed quite widely by market participants. We are not throwing the baby out with the bath water,” he said.
“I think we have done this in a very proportional way but in a way that is addressing the heart of the issue.”
Auditors’ consulting fees came under criticism in the wake of the crisis. In October 2009 the Treasury Select Committee, in its post-crisis review, called for a ban on audit firms collecting consulting fees from companies they audit.
“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,” the committee said.
But the APB’s consultation found little appetite for a complete ban.
The Investment Managers Association, which represents £3 trillion of investment in the UK’s management industry, was one of three which highlighted concern around restructuring services.
“Where the same firm provides both an audit and a restructuring service to a company in distress, a number of investors consider ethical standards should ban a company’s auditor from carrying out restructuring services in such situations,” the organisation said in a January letter to the APB.
However, the Confederation of British Industry (CBI), said auditors were providing a vital service to companies.
“This is a very important service to business, particularly such as now following the financial crisis, when there is a downturn in the economy and increased numbers of companies in difficulties, who need to restructure to survive and save or protect jobs,” the CBI said in its submission.
“Speedy action and help from the audit firm is required if the restructuring is to be successful.”
The new rules will also force auditors to consider their ethical position when their level of non-audit fees approaches the level of audit fees they receive from the same company.
In 2008, the average ratio of non-audit to audit fees for listed companies was 76% according to a study by the APB. Three hundred of the 1,740 listed, companies surveyed had ratios that were equal to or exceed 1:1. Two thirds of these companies had a ratio of 2:1 or less, and some had ratios above 5:1.
Company’s audit committees will also have to provide more information on why they have chosen an audit firm to provide a non-audit service, under the rules.
Grabowski said the changes were aimed at maintaining investor faith in auditors.
“Perception from investors is critical to their trust in the audit and where investors are expressing concern, where auditors may not be independent, we felt it was right to assess the circumstances and make it clearer what auditors may or may not do,” he said.
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