PracticeConsultingComment – It was never going to be easy.

Comment - It was never going to be easy.

Trying to replace a statutory audit for smaller companies with an

Introducing the Independent Professional Review was never going to be easy. Views were always bound to vary enormously – both within the profession and without – over proposals by the Company Law Review Steering Group to replace a statutory audit for smaller companies with an independent review.

Back in May, the APB proposed that an IPR should be ‘an evidence-based engagement that provides a limited level of assurance expressed in the form of negative assurance that the financial statements are free of material misstatement’. From the response to the APB’s discussion paper on the proposed IPR, it is clear there is much to do before it can become a meaningful assurance engagement.

Remember trade secretary Stephen Byers was trying to lift compliance costs and red tape by increasing the audit threshold. But neither he, nor the APB, nor anyone else in the audit and assurance profession has any real idea of the likely savings associated with replacing a statutory audit with an IPR. At the same time, many auditors fear the IPR as currently described by the APB is not sufficiently distinguished from an audit.

In an attempt to end some of this uncertainty, the APB – in co-operation with accountancy bodies – is to ask some registered auditors to actually carry out some real-life IPRs, under academic supervision, in order to obtain some proper information on the reactions of directors and shareholders to an IPR, its likely cost and its effectiveness in identifying material misstatements. Equally importantly, these trials will enable the APB and auditors to get a feel for the type of procedures which will have to be performed in order to sign-off on an IPR.

The research answers that, this field testing is important; Stephen Byers is going to take into account the final recommendations of the steering group before proposing what, if any, statutory requirement should replace, the full audit for smaller companies. Maybe, for instance, the IPR won’t kick in until a company has turnover of #2m, rather than the #1m which has so far been assumed. Or maybe if the IPR looks like being a nightmare it won’t be introduced at all.

For the IPR to be a success it must provide a meaningful level of assurance at reasonable cost. It also needs to be distinguishable from the statutory audit, otherwise there will be confusion. At the moment, the IPR has a fair measure of support. The results from this testing need to demonstrate the issues of cost and clarity can be addressed, otherwise support is not deserved.

Peter Williams is director of Kato publishing.

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