Uncertainty principles
Audits are at a greater risk of going wrong because of the dire economic circumstances
So says the Financial Reporting Council in its draft plan for 2009/10. The
head of its Audit Inspection Unit says there are more difficulties around issues
like going concern.
The FRC’s fears were writ large last year as two papers emerged from the
regulator urging auditors not to make their default position to issue statements
about ‘material uncertainty’ over a company’s ability to continue trading just
because we are in recession.
What the FRC doesn’t want is auditors tipping companies over the edge for no
good reason.
The audit inspectors will be looking at work in some key sectors to mirror
the work of colleagues at the Financial Reporting Review Panel. They will use
key criteria to select the audits they review: whether a big client is using a
disproportionately small audit firm; large non-audit fees compared to a small
audit cost, whether a client complies with the combined code on corporate
governance.
But there are two things the AIU might consider. Firstly, the delay between
inspection and publication of results. Inspections published at the end of last
year came more than a year after the audits were completed. A speedier process
would give them greater impact if they relate to topical events and show the
regulator has reacted promptly.
Secondly, AIU reports give no indication which specific audits have been
targeted. But, if the inspector wants to be seen to be acting on concerns in
specific sectors, the public may need to be told which sectors. Some of that
will be implicit. A report that highlights the faulty valuation of derivatives
or securities might just give away the type of audit that has been reviewed. If
you see that, wait for the protests to begin.