The Debate: The quest for transparency

What’s good for the goose…

By Michael Groom

‘We would… urge in particular those accountancy firms which are auditors of listed companies, or of companies in which there is a legitimate public interest to take the initiative to improve openness and transparency.’

These words appear in the interim report of the DTI’s co-ordinating group on audit and accounting issues.

I imagine that, in today’s climate, few would disagree with such sentiments but what form should such an initiative take.

One possible model would be to mirror the requirements placed on listed companies regarding financial reporting, audit and relevant aspects of corporate governance. What is good enough for the goose etc!

To be effective the requirements would need to apply whatever the trading style, be it partnership, limited liability partnership or company.

Accounts would be published on each firm’s website, prepared in accordance with IAS and containing a partner’s/director’s report to include, in particular, information on how the firm seeks to ensure audit quality including independence.

The accounts would be audited in accordance with ISA by external independent auditors. Non-executives would be involved in a purely corporate governance role. The role would need definition, in the form of a set of principles, to meet the need for transparency while recognising the position and structure of the firms.

The system would be enforceable by amendment of the audit regulations of the relevant institutes and compliance would become part of the normal existing monitoring process.

Much of this is already in place or would be relatively easily complied with in the affected firms. Nothing revolutionary, however formal adoption of some such proposals could meet the understandable public interest in openness and transparency.

Let me stress that these are personal views and do not represent the views of the council of the ICAEW.

Michael Groom is a non-executive director and immediate past president of the ICAEW

Time for real transparency
By Jonathan Beckerlegge

The Trade and Industry Secretary’s call for the major firms to ‘improve openness and transparency’ referred specifically to information about processes, practices and structure, as well as the publication of full financial statements and accounts.

Patricia Hewitt indicated that she was considering making such transparency a condition of a firm’s eligibility to audit listed and public interest companies.

It looks as though the die is cast – but will this be enough? How much further will firms need to go to rebuild the confidence of the government, general public and potential clients?

Producing detailed financial statements should be simple enough, although even the audit firms which have taken a lead in this respect have a long way to go in providing information, such as segmental reporting and an OFR, which is routine for their large company clients.

But full transparency is not just about accounts and statistics about how the firm’s fee income is derived. It may require an in-depth look at the relationship between firms and their clients – even their former clients – which may test the bounds of client confidentiality if it is to be effective.

What clients and potential clients really need to know is how the firms do, and will perform as auditors.

Do they operate ethically, and are there practices and procedures in place to ensure that this is so? Are there structural safeguards to ensure the auditor can retain professional scepticism and independence?

Part of the solution may lie in the publication of the full reports of regulatory visits to firms. Ofsted inspectors’ reports, which look not just at the quality of education, but at all aspects of the way in which schools are run, are publicly available on the internet.

Why should monitoring reports on major firms not be similarly public – whether the visits are carried out, as now, by monitoring units from the professional bodies, or by an independent regulator?

If the profession is to repair the damage to its reputation, it needs to take the initiative. Enhanced disclosure and the publication of monitoring reports could be an important first step.

• Jonathan Beckerlegge is president of ACCA