Sink the Wishee Washee Review, says Stella Fearnley
Before the Christmas panto season starts let us hope the profession’s own long-running, costly pantomime about the independent professional review and the small company audit exemption threshold will finally close. The results of the Auditing Practice Board’s research, which comprised 20 field trials of the IPR, demonstrate that the assurance it provides to stakeholders is as Wishee Washee as the character in Aladdin. The research, unsurprisingly, shows that the IPR is cheaper than audit, as it requires less work. However, concerns from participants both about the lack of corroborative evidence and the extent of reliance on directors’ assurances emerge strongly. Put plainly, IPR lacks the very things that make audit worth paying for: independent verification of material items in accounts and a carefully drawn up opinion on which reliance can be placed. What reliance can be placed on an independent accountants’ report on a balance sheet and p&l account where existence of stock, collectability of debtors, and completeness of creditors have not been independently verified?’
The profession, and particularly the APB, will damage its public reputation if it legitimises such a valueless exercise, particularly when the tried and tested audit service is readily available for little extra cost. The IPR should be binned now, before it absorbs any more resources.
The IPR debate has also muddied policymaking on the exemption threshold. Given the protection against creditors afforded to directors by limited liability, we should be debating the extent to which they should be trusted to comply with accounting requirements without audit, not pussyfooting about with intermediate measures. Wherever the threshold is set, a market for voluntary audit will develop beneath it, and nothing else is needed.
Stephen Byers, with the benefit of misinformation from an adviser, committed himself to eventually raising the threshold to £4.8m. It is too soon to assess whether last year’s increase to £1m has created a deterioration in compliance.
It is possible effective mechanisms may be needed to deal with directors who file meaningless or misleading information. Raising the threshold is a one-way ticket. It would be surprisingly imprudent for the DTI to raise it again in an information vacuum, and at a time of economic instability, when the APB has itself recognised that directors have greater motivation to manage earnings.
- Stella Fearnley is a reader in accounting at Portsmouth Business School
Let’s stop being resistant to IPR, says Danielle Stewart
Recent events have made this a particularly inopportune moment to raise the audit exemption threshold, but the recommendations of the company law review mean that an increase is bound to be back on the agenda again very soon.
Whenever this may happen, I believe it is imperative for some form of external assurance to be introduced in place of the audit, and I contend that the independent professional review (IPR) is perfect for this purpose.
Let’s consider a few facts about the IPR. The APB performed field trials on 20 engagements, which showed clearly that an IPR costs less than an audit. Savings averaged 27% where the accounts were also prepared, and a staggering 61% where a ‘pure’ IPR was performed.
As to its effectiveness, in eight of the 20 engagements, the IPR detected errors. For six out of these eight, no further mistakes were detected by the audit! A sizeable majority of the practitioners involved in the field trials considered the IPR to be as effective as an audit in identifying going concern problems. And yet the IPR is attracting very little support from practitioners generally. Why is this?
My theory is we, as a profession, are very change resistant. For example, when audit regulation was first introduced, auditors insisted evidencing audit work was a waste of time.
In fact, pre-regulation audit files were little more than an analytical review, supported by the accounts preparation workings. The files contained no evidence. Over the past decade, we have learned to evidence audit work thoroughly, so practitioners are horrified by the idea that assurance might be provided without obtaining corroborative evidence.
Let’s stop being resistant – the IPR is better than the audit for small companies, because it is cheaper, yet almost as effective. I recommend audit exemption stays at £1m until the new Companies Act comes into force, by which time the IPR will be better understood by the profession.
The government can then mandate the IPR in place of the audit for companies with a turnover up to the EU maximum. This would follow the principles of the company law review, by providing maximum freedom to participators while protecting disempowered stakeholders and society in general.
- Danielle Stewart is a partner at Warrener Stewart and chairman of the technical committee of the London Society of Chartered Accountants
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