Some say an engagement that relies on directors’ assurances and high level analytical review is not effective. They refer to the IPR as lacking detailed verification procedures. I would reply, (a) it worked well for small companies being audited during the eighties and (b) detailed audit testing finds few errors in financial statements, as is recognised in the latest big firm audit methodologies that use analytical review instead.
As for reliance on directors’ assurances, the point of the IPR is the reviewer may only rely on assurances where the accounts are consistent with their knowledge of the company’s business.
There is also concern that having two levels of statutory assurance might cause an expectation gap. We should not worry about this, because the current trend is to recognise the fact that the regulatory needs of smaller, owner managed entities are different from those of larger, publicly owned entities.
This started with accounting standards (the FRSSE) and auditing standards (Practice Note 13) and has now followed through into the Company Law Review (‘think small first’). The IPR is part of this trend, which recognises a differential approach is more likely to lead to cost effective and appropriate regulation of both sectors.
There is one point on which everybody agrees – the IPR will not be adequate to spot a well-executed management fraud.
But neither is the audit! The real problems in small companies (which are misstatement of accounts designed to minimise tax liabilities, not large scale fraud) are found just as well by the IPR as the audit. This is substantiated by early results from field trials of the IPR.
What UK plc needs is cost effective and appropriate regulation of small companies. A statutory IPR, performed by a suitably qualified independent accountant with the right knowledge about the company, is exactly the right model to provide this light touch assurance.
- Danielle Stewart is a partner at Warrener Stewart and a member of the DTI’s Company Law Review team.