PracticeAuditA white elephant is born

A white elephant is born

The modern take on the IPR has arrived far too late (this is a longer version of what appears in Accountancy Age magazine)

Twenty years ago, a small company “audit” was nothing more than a thorough
accounts preparation exercise, combined with an intelligent analytical review of
the accounts, usually done by a Partner who knew the company very well. This
service was well received by clients, and cost effective for practitioners to
provide. With the advent of audit regulation at the end of the 80’s, everything

The JMU insisted on box ticking, form filling and compliance with standards
that were largely impossible to enforce in the small company environment.
Through my membership of the First Audit Registration Committee of the ICAEW, I
saw the problems that practitioners were experiencing, and realised that there
was a need for change. Two initiatives followed which helped a lot – the APB
Small Company Committee produced the Practice Note for small businesses (PN13)
which gave pragmatic, work saving guidance for small company Auditors.
Subsequently, we set up the Audit Faculty at the Institute, which instigated an
annual road show to help keep practitioners on track and developed much useful

Even so, throughout the 90s practitioners continued to complain that the
audit was becoming increasingly less cost effective to perform. Political
pressure led to at first, in 1994, limited exemption from audit until
eventually, in June 2000, the turnover limit was raised to £1m. This exempted
97% of small companies from audit.

At the time that this happened, I was one of many people involved in small
company regulation who was concerned that such a leap in audit exemption levels
would lead to anarchy and chaos. Through the Company Law Review, we had already
started to develop a replacement assurance service called the Independent
Professional Review (IPR), which was an assurance engagement which provided less
assurance than the audit but more than the complete lack of assurance provided
by a compilation engagement.

The assurance provided by an IPR is known as negative assurance, that is, the
reviewer states that nothing has come to their attention to say the accounts are
not in accordance with the relevant financial reporting framework. The work done
is procedural in nature ie. the procedures that will be performed are defined.
We exposed the IPR through the Company Law Review, and respondents basically
wanted more information before concluding on whether it should be introduced as
a statutory requirement. The DTI delegated the task of researching the IPR to
the Auditing Practices Board who performed some detailed research. The findings
of the research were very positive. For instance, cost savings averaged 27%
where the accounts were also prepared by the accountancy firm and 61% where a
“pure” IPR was performed. It was also very effective – in 8 out of the 20
trials, the IPR detected financial statement misstatements and in 6 of these 8
engagements, no further mistakes were detected by the audit. Despite the success
of this research, the IPR was not mandated by the DTI, mainly because the ICAEW
would not support it, believing that practitioners would not like it.

Imagine my surprise when I found out last year that the Audit Faculty was
developing a new technical release detailing an assurance engagement which was
exactly the same as the IPR! I was delighted to give my input on the technical
aspects. At last, my dream was realised; an official mandate existed for an
engagement which formalised the down to earth approach used in the old style
“audit”. However, having given great thought to the document (Interim Technical
Release AAF 03/06), released last month, I have realised that there is no point
introducing this service now. Had this product been available when exemption
limits were first raised, we could have sold it to clients, banks, and creditors
as being an essential report in the absence of an audit.

However, in the six years since exemption limits were substantially
increased, banks have developed their own risk based assessment techniques and
despite the regulators’ expectations, they seldom demand an audit. Creditors
rely on the increasing information available through credit rating agencies,
which become every more sophisticated. Company Directors still use their
Accountants to produce year end financial statements, but even the research
produced by the ICAEW along with the new guidance shows that clients would be
reluctant to spend money on an assurance engagement unless it could be proved to
deliver real benefits, such as increased ability to raise finance. This is
unlikely to materialise in light of my comments above. Now that everyone has
managed for six years with no assurance service whatsoever, it is simply far too
late to introduce one.

Sadly, despite its undoubted technical validity, and the best intentions of
the Audit Faculty, I fear that Technical Release AAF 03/06 is doomed to be a
white elephant – it’s just so 20th Century Dahling!

Danielle Stewart is a Client Partner at Vantis

Related Articles

PwC replaces EY as Domino's auditor

Audit PwC replaces EY as Domino's auditor

8h Alia Shoaib, Reporter
The ‘uncomfortable truth’ behind FRC’s Big Four fines recommendations

Audit The ‘uncomfortable truth’ behind FRC’s Big Four fines recommendations

6d Carl Johnson, Stephensons
BDO holds off Big Four to retain top position as AIM auditor

Audit BDO holds off Big Four to retain top position as AIM auditor

1w Alia Shoaib, Reporter
FRC urged to fine Big Four firms penalties over £10m

Audit FRC urged to fine Big Four firms penalties over £10m

3w Alia Shoaib, Reporter
EY to audit Standard Chartered bank

Audit EY to audit Standard Chartered bank

1m Alia Shoaib, Reporter
KPMG replaces PwC as Croda auditor

Accounting Firms KPMG replaces PwC as Croda auditor

2m Emma Smith, Managing Editor
EY fined £1.8m over Tech Data audit

Accounting Standards EY fined £1.8m over Tech Data audit

2m Emma Smith, Managing Editor
Top 50+50: Firms post significant growth in new tax and audit rankings

Audit Top 50+50: Firms post significant growth in new tax and audit rankings

2m Emma Smith, Managing Editor