PracticeAccounting Firms…on auditor independence

...on auditor independence

Auditor independence is once more at the top of the agenda, but what needs to be done? First, accounting and auditing standards should be harmonised worldwide, with substance taking precedence over form. It's also important that audit remains broadly based, ensuring that it still attracts first-class people.

Regulation must be improved and funded independently. Responsibility for audit registration and ongoing assessment through the joint monitoring unit should pass to the Accountancy Foundation.

European Union recommendations on auditor independence in particular the seven-year rotation of all key audit partners should be implemented as soon as possible.

The banning of non-audit services as a broad basis is restricting choice for the buyers in areas where there is no inherent conflict.

All auditing firms should be made to publish annual accounts. They should disclose the basis on which audit partners are rewarded and state what systems and quality processes are in place. We do not think that compulsory rotation of audit firms or retendering is the answer to the profession’s perceived shortcomings. Whilst it would increase the perception of independence, it would tend to lower audit quality. The evidence is that the first year or two of a new audit are more vulnerable to failure. There is also the danger in the last year before rotation that audit quality may tail off.

Independence can be achieved only if both the appointment and remuneration of auditors is by some body other than the company. However, appointment by an audit commission cannot be a meaningful option for major companies since either the Big Four would take it in turns to act or the audit commission would be in the invidious position of effectively deciding on the commercial success of the Big Four firms. The inevitable end result of going down this road would be a nationalised audit profession.

  • Nick Land is senior partner at Ernst & Young UK.

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