Haddrill says the new legislation gives the profession the opportunity to "make sure the public can have confidence in the regulatory regime
THE EU AUDIT Regulation Directive (ARD) represents a great opportunity to raise the status of audit and restore confidence in the discipline – providing the profession “gets it right”.
That was one of the messages to emerge from the Financial Reporting Council’s recent panel discussion on ‘Enhancing justifiable confidence in audit through implementation of the EU Audit Regulation and Directive’ about its ramifications for the industry and wider business community.
Panellist Hywel Ball, EY’s UK head of audit, said that while the opportunity for positive change was clearly there, the profession was “on a tipping point” thanks to a “perfect storm” of innovation, big data, concerns over corporate cyber attacks such as that which affected Talk Talk, and the fact that “corporate reporting is becoming less relevant”.
The Big Four audit kingpin stressed that “firms have to get to grips with the new business model first” and that “while companies all know they have to tender, I don’t think they’ve thought through the ramifications of some of those non-audit services and how they’re going to make sure that the companies are ‘clean’ (independent) to take on a tender”.
“They’re very much intertwined and it’s more complicated than people think and some companies have been caught out by this.”
He cited the sobering example of Schroders, which in March 2013, reinstated PwC as its auditor after KPMG told the asset manager it would breach regulatory requirements if it took up the appointment.
PwC was quietly ushered back in as Schroders’ auditor, having lost out to KPMG two months earlier after auditing the company for over 50 years. The about-turn was announced in Shroders’ annual report, in which it revealed that, since the tender process, KPMG revealed its appointment would conflict with other interests.
FRC CEO Stephen Haddrill highlighted that the new legislation gave the profession the opportunity to “make sure the public can have confidence in the regulatory regime” while also ensuring that it implements the standards that underscore “the independence of the auditor and the auditor’s freedom from influence from the company that they are auditing”.
While the FRC is the independent regulator, “the professional bodies have a very important role as regulators in their own right and the legislation asks us to separate out the responsibilities that we, and the professional bodies, have”.
“In doing so we achieve clarity about who does what. At present the arrangements between us and the professional bodies are really quite convoluted and I think we will emerge from the change with a greater sense that the word independent, in independent regulation, really means what it says and that the professional bodies themselves, are also committed to raising standards in their membership.
The dividing line between them, he said, was down to the European Union’s definition of what a Public Interest Entity (PIE) is. It is “a listed company or one of a long list of companies in the financial services sector including some relatively small insurance companies”.
“So we will be taking on responsibility for audit inspection across the totality of that list and we’ll also be responsible for other matters in that area including disciplinary matters. Professional bodies will be responsible for inspection and discipline outside that public interest area….but that includes some quite significant private companies.
“I think we’ll end up with a brighter light between our responsibility and that of the professional bodies and the clarity that the government has created the FRC as the single competent authority that will be delegating its powers where it can – and wherever it can – to the professional bodies and looking to them to raise standards in their membership.”
Other panellists included the FRC’s executive director of codes and standards, Melanie McLaren, audit policy director Marek Grabwoski alongside Rodger Hughes, chairman of the National Counties Building Society and a former audit committee chair.