By Douglas Llambias
A number of senior members of the profession believe that to re-establish faith and confidence in auditing important new initiatives must be addressed.
In particular post-Enron we need a better regulated and more transparent profession.
The rules should change in eight key areas for auditors of publicly quoted companies.
Firstly audit firms should annually publish a full profit and loss account and balance sheet that additionally reveals the total fees from all disciplines earned from its five largest clients.
It should also list all clients that provide more than 5% of its fee income on a national and international basis.
Audit partners should be prohibited for at least one year from taking up senior appointments at audit clients. They should also be prohibited from supplying internal audit services for a client they audit.
Audit committees should be strengthened and require the auditor to provide an annual statement demonstrating their independence and listing all services given and fees earned from that client. Key regulatory body, the Accountancy Foundation, should be funded and overseen by government and not the firms it seeks to regulate.
Reports on audit firms by the ICAEW’s joint monitoring unit should be made public and available on the internet as are school reports by Ofsted.
Auditors should be rotated every five or seven years.
Any extra costs so incurred pale into significance if just one less major company failure occurs. Auditor rotation should be linked with a system of dual auditors, as in France where both firms of auditors are appointed for a minimum period and are more independently secure in their appointment.
And lastly, very substantial or sensitive audit work such as advising on directors’ pay and incentive schemes should be prohibited as they will rightly be seen as too cosy a relationship between audit firm and some clients’ senior management.
Now is not the time for the accounting profession to be timid. The institute should recommend a better regulated and more transparent profession and it should start the process by encouraging rather than prohibiting open debate on these rule changes.
- Douglas Llambias is chairman of The Business Exchange and a member of the ICAEW council
Think the consequences through
By Peter Wyman
The collapse of Enron in the US has caused a loss of confidence in company accounts around the world. Since the beginning of this year I have been working hard to explain the differences between the UK and the US systems of financial reporting, corporate governance, auditing and professional regulation.
I have stressed the pioneering work of Sir David Tweedie and Adrian Cadbury in the 1990s, the work of the APB, CAJEC and the development of the Accountancy Foundation. Overseas, and particularly in the US, there has been considerable interest in learning from our experiences.
At home, confidence has started to return as a growing awareness of the differences has resulted.
However, I am the first to recognise that more has to be done. But we are dealing with complex and multiple issues here. Making the wrong decisions may not simply fail to deliver improvement.
It is also worth remembering that we do not yet know what really happened at Enron. Was the problem that the accounts did not comply with US GAAP, or was the problem US GAAP itself? Did the audit fail? If so, why? Was the governance structure ineffective and, if so, were the reasons peculiar to Enron, or are there wider issues?
Indeed, was it the structure or the people that were at fault? The institute has long been conducting research to develop corporate reporting.
In the past few months we have been working flat out to research evidence to respond to the Enron crisis.
Every suggestion for improvement that has been made will be considered by the relevant staff and institute committee and, as the necessary evidence to reach a conclusion has been obtained, a recommendation will be made for consideration by council, either proposing change or no-change as appropriate.
I am confident that the institute’s council will continue to determine policy which is based on sound research and careful consideration rather than rushing to judgement before the whole facts are made known.
- Peter Wyman is deputy president of the Institute of Chartered Accountants in England & Wales.
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