In particular, it is urging them to include a statement setting out how they have ensured that their auditors are independent of management. This move by the ABI, whose members account for some 20% of investments in the London stock market, is significant in two ways.
First, it illustrates that investors are actively taking an interest in financial reporting and audit issues in the wake of Enron, rather than shouting angrily but vaguely that something must be done.
Secondly, it illustrates that the investment community is, in general, considering the issues arising from Enron calmly and sensibly. The ABI’s letter-writing frenzy follows its publication, in March, of a discussion paper on the audit process after Enron.
Its tone is measured, but it highlights the importance of maintaining confidence in audit, pointing out that a loss of confidence could result in an abrupt and arbitrary withdrawal of capital from businesses deemed to be suspect.
Compared to some proposals floating around at the moment, its suggestions are positively moderate. It comes out against the forcible rotation of auditors, but says new auditors should be appointed when an audit partner is promoted to a senior position, such as finance director, in a client’s business.
It also says non-audit work should be awarded on an ‘appropriate’ basis, and that audit committees should be made more accountable for ensuring that this is the case.
There is nothing in its suggestions that should really have audit partners or the chairs of audit committees spluttering over their coffee.
There has been a tendency among senior auditors since the Enron scandal blew up to say there is a misunderstanding of the role of audit, and that people have an exaggerated idea of what it can achieve.
The ABI’s action has shown that this is not necessarily the case. The accountancy profession, both in practice and in business, needs to sit up and take a careful look at what this body, and other groups representing investors, has to say.
Only when this happens will investors start to gradually rebuild their shattered confidence in the financial reporting and auditing process.
Mark McMullen joins the private client services team from Smith & Williamson
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