The Debate: The DTI audit report

Rebuilding public confidence

By Dennis Taylor

The publication of the interim report is a welcome sign that the government, along with the accountancy profession, is getting to grips with the issues that have led to the collapse of confidence in the capital markets.

It is in no-one’s interests that scepticism about the integrity of financial information should be allowed to fester. I am therefore encouraged by the fact that the high level group set up by Patricia Hewitt has been able to come up with a coherent set of proposals covering a wide range of issues.

In my view, the government has taken a mature and reasonable stance to the aftermath of Enron, WorldCom et al. It has responded to the question ‘could similar outrages happen here?’ by reminding us all that such scandals have already happened here, but that we have reacted to them by taking important steps to put our collective house in order.

Horrific though the professional and regulatory failings at those companies appear to have been, we should not assume that the remedial actions needed here are the same as those needed in the US. That said it would be foolish to be complacent. This is the right time to consider, in a measured manner, what more can be done to improve our own ways.

I think, in particular, the roles of audit committees and non-executive directors need clarifying and reinforcing. Both the auditor and the non-executive directors, as well as shareholders, stand to benefit from a secure and respected channel of communication between the two. Shareholders need reassuring that the audit committee is independent of executive involvement and can act, credibly, as the guarantor of the auditor’s independence.

As regards the provision of non-audit services to the company, it is inevitable that more restrictions will need to be brought in. There should be a clear list of services which should be out of bounds on the basis that they give rise to a real or perceived risk to independence.

  • Dennis Taylor is finance director of the International Herald Tribune Ltd and an ACCA council member.

UK could be forced to follow US
By Roger Davis

Following last week’s press coverage of the government review of accounting and auditing regulation, one of my partners said: ‘I’m fed up. Shouldn’t an ordinary audit partner stand up?’ The UK is fortunate to have some of the best educated auditors in the world, whose integrity is second to none in the business community. We canĂ¥t afford them to be ‘fed up’.

Of course, the government should air the issues, given what has happened in America. But, no systemic UK problem has been identified and the proposals rightly avoid a leap into the dark of more regulation. There are several reasons for caution.

Audit firm rotation would put auditors in continual ‘selling mode’, the reverse of what people say is needed: higher fees and more independence. And the variety in a firm providing non-audit services is crucial to the experience and retention of good people.

Substantially extending the role of the Financial Reporting Review Panel could reduce the judgement of the auditor when all agree that a principles-based approach to accounting is the way forward and the auditor’s status should be enhanced. Those who have ‘pre-cleared’ accounting with the SEC will know what I mean.

In enhancing the role of audit committees, we should be careful not to undermine the British unitary board with executives and non-executives working as one. It looks ever sounder against the problems in the US.

The real concern is that the UK may not be able to take many of these decisions for itself. President Bush will shortly sign into law the highly prescriptive US corporate reform act. UK auditing will be substantially regulated from the US because we audit SEC-registered clients. America is learning the lessons we learnt after the corporate scandals of the 1980s. The difference is that much of the legally prescriptive American solution will be imposed on this country.In this country, the enhanced role of the Financial Reporting Council in maintaining a constant watch on governance and accounting, as recommended by the recent company law white paper, will help to ensure that the UK is not caught off-guard like the Americans.

  • Roger Davis is head of professional affairs at PricewaterhouseCoopers.

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