13 May 2002
An open letter to the Deputy President
The Institute of Chartered Accountants in England and Wales
Chartered Accountant?s Hall
PO Box 433
BY FAX AND POST
Dear Deputy President
Determining Institute Policies on Auditor Independence
You will recall that since February, I, and some other Council members, have repeatedly asked that Council be allowed to debate the policies that are being put forward by you and the President in relation to Auditor Independence and the alternative ideas that are being debated externally and which include:
– Rotating auditors (and not just audit partners) every 3-5 years
– Appointing dual auditors ? as in France
– Prohibiting, for a minimum period of 2-5 years, the appointment of retiring audit partners as directors of audit client companies
– Prohibiting the provision of substantial non-audit services such as consultancy, directors compensation schemes and corporate finance to audit clients.
To date, you and the President have refused to allow Council to debate these matters on the grounds that:
“You will not, until August at the earliest, complete a programme of research that has been initiated by you in relation to Auditor Independence and unless this research programme demonstrates a need for change to the Institute?s current stance, then no Council debate will be held”.
At the same time, Council has not been provided with a clear insight into the extent of this “research programme” nor have copies of any research questionnaire or other material that has been provided to those with whom you are conducting your research, been made available.
In the meantime, you primarily, but supported by the President, have been strongly promoting to both the Treasury Committee and the Media, a policy of:
“No change to the current arrangements in relation to Auditor Independence”.
Both you and the President have confirmed that you have both spent considerable time and Institute resources in pressing the case of ?no change, no knee-jerk reaction?, even though these policies have not been reviewed or endorsed through the process of open debate at Council.
As you know, neither you nor the President disclosed to Council that the big four firms have agreed to pay a combined sum of £40,000 to the Institute towards the time and other costs that are being incurred by you, the President and members of the Secretariat, in dealing with the Treasury Committee Investigation and Media enquiries stemming from Enron.
I do not believe the office holders have had a mandate to accept funding from outside organisations in relation to the Institute?s costs in dealing with such specific matters, and I consider that there is a real danger that the acceptance of £40,000 from the big four will be interpreted negatively.
Questions will be asked as to whether conditions have been set by the four major firms for the payment of £40,000. This payment and any conditioning attached to it could be seen as having an influence on the active promotion by the Institute of a “no change, no knee-jerk policy” particularly when such a policy primarily supports the commercial objectives and policies of the big four.
Such a payment could also raise questions as to whether the “no change” policy itself has been determined by the big four or by the Council of the Institute, particularly when the Council has been refused a debate on the subject.
I believe it is very important that the Institute be seen as an independent body fairly and reasonably representing the interests of all its members. I cannot see how the linking of the existing “no change policy” to a payment of £40,000 from the big four will do anything to enhance the standing and reputation of the Institute and the accounting profession. Indeed, I believe it will do the very opposite.
I would ask that the four larger firms be informed that it is inappropriate for the Institute to accept any funding from them in relation to the Institute?s costs in dealing with the formulation or lobbying of Institute policies on Auditor Independence and would hope that you agree.
I would also ask that, in the circumstances, there should be an urgent independent review of Institute policy on Auditor Independence and that when you do allow an open debate by Council on this matter, those members of Council who are partners with firms who could be affected by any changes in policy should declare an interest and refrain from voting.
I can see little benefit in holding an open debate after the Treasury Committee investigation has been concluded and therefore hope you will allow an early debate on this subject.
I look forward to hearing from you.
15 May 2002
The Business Exchange Plc
21 John Adam Street
Thank you for your open letter of 13 May, the contents of which leave me rather perplexed. I have checked the minutes of the Council meetings held in February, March and May which indicate that you attended on each of the occasions when these matters were discussed. I would particularly refer you to the report from Michael Groom to the May meeting, which provided Council with a comprehensive picture of all the work we are currently undertaking in this area, both alone and in conjunction with other bodies.
Within the Institute the work programme mentioned in Michael’s report to Council is being led by our Ethics and Technical Committees and staff. Policy changes, which should be supported by evidence based research, will come to Council for approval in due course following wide consultation. Meanwhile, our current policies have all been approved by Council.
As reported to you at the last Council meeting, we have indeed secured some additional funding from the large firms to allow the extra work we now require to be done on a timely basis. You, more than most, are aware of our current budgetary constraints. This work includes ‘literature reviews’ of global academic research and independent consideration of mandatory rotation and non-audit services as well as additional support from our external public affairs agency on such matters as appropriate contacts with US policy makers. The research findings will inform our own deliberations and those of the regulatory bodies with whom it will be shared. It may be that further projects need to be funded, in which case I would hope to be able to secure additional support from a number of sources, including the larger firms.
However, for the avoidance of doubt, let me repeat that the outputs from these research projects are merely inputs into the Institute’s committees who will report to Council, as and when appropriate, for decision. I remain convinced that our Council meetings are the right place to discuss these issues and reach a common view on new policies after the appropriate specialist committees have offered us their considered advice.
I believe, as you do, that these issues are important and urgent. They affect the whole profession and I hope that all Council members will continue to be fully involved in the debates to come.
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