The Debate: Selective review of accounts.

Selective review of accounts

By Ian Brindle

‘Large scotch and water, Ian?’

‘Thanks.’

‘You’re going to need it judging by 31 July’s issue of Accountancy Age. Reviewing more than 300 accounts a year would drive anyone to drink!’

‘No, I’m not reviewing that many accounts, page by page.’

‘OK. But what will you be reviewing when the panel goes pro-active?’

‘We’ll be concentrating on the larger companies and looking at a complete mixture of things actually – sometimes a full set of accounts, sometimes a particular issue in a set of accounts – it will vary according to our risk assessment.’

‘What risk? What assessment?’

‘The risk is that something in the accounts does not comply with the rules – company law, accounting standards and so on. Obviously that risk exists in all accounts, but some more than others, so we are developing risk assessments to point us to those situations where risk of non-compliance is greater.’

‘Give me an example.’

‘My favourite is where profits are going one way and cashflow is going in the opposite direction. That suggests the accounting policies are going to be stretched, so the risk of the accounts not complying is higher.’

‘So there I guess you’d review the accounts from end to end, but give me an example where you would look at just a part of the accounts.’

‘Take the introduction of a new accounting standard. In the first year there is a greater risk of compliance being less than desirable, so we will look at dozens of accounts, but only to examine that one issue.’

‘So if you’re looking at, say, a couple of hundred or more accounts or parts of them, I guess you’ll find all the mistakes in all the top companies’ accounts.’

‘It’s you who needs a drink if you believe that! We are definitely not reviewing all the top companies’ accounts and we can’t find all the mistakes – it’s not possible. But we can play an important role with directors and auditors in helping to ensure accounts comply with the rules.’

‘I’ll drink to that!’

• Ian Brindle is deputy chairman of the Financial Reporting and Review Panel

Proposal insults professionals
By Nigel Collins

In the aftermath of the Enron era, which witnessed the demise of Andersen, today’s professional regulators are rightly concerned to restore public perception of the profession’s probity.

At first glance, the news that the Financial Reporting Review Panel (FRRP) is to review hundreds of listed company accounts each year, to check they are complying with accounting and disclosure rules, should be an encouragement for the future.

However, since these companies are usually audited by a Big Four firm and are supported by a variety of professional advisors, it appears that the FRRP will challenge the auditors, company advisers and directors.

The proposal, apart from ignoring the fact that most of the filed accounts are for unlisted companies, also appears to question the auditors’ ability to form an opinion.

Moreover, the proposal discounts the fact that Big Four practices, and most others, now have well-established peer review procedures and processes in place, which effectively carry out de facto reviews akin to those proposed by the FRRP.

Since the panel’s proposal is likely to impact upon finance directors, their auditors and financial advisers alike, the determination of accountability and appropriate judgment for accounts deemed to be unsatisfactory by the FRRP, is likely to be seen as both contentious and an unwelcome intrusion into professional independence and judgments.

Under these circumstances, the spectre of a public battle to defend professional integrity is unlikely to enhance the profession’s reputation.

If the FRRP is to carry out more than window dressing and is to be genuinely proactive, there is surely a case for reviewing accounts prior to their publication, although it is difficult to see how this suggestion can be reconciled with auditor independence.

While accepting that no processes are fail-safe, I have difficulty in determining how the proposal, if extant at the time, would have prevented the misfortunes that befell the shareholders of Polly Peck, Mirror Group, BCCI and Barings, for example.

• Nigel Collin is a chartered accountant in business.