Restoring confidence in audit

Michael Chamier, director of finance at the European Parliament, suggested in Accountancy Age that ‘auditors must be and, more importantly, perceived to be independent’.

These comments echo the thoughts and words of Arthur Levitt, head of the US Securities and Exchange Commission. But these dissenters seem lone voices within the profession. Most UK press coverage on audit independence has been critical of the US regulator’s plans. But why has the SEC been so criticised, as it is merely seeking to restore public confidence in the audit function?

Brand Finance recently released two reports on auditor independence.

Both suggest the steps taken by the SEC are justified. First we investigated the views of 292 UK City analysts. This study revealed 94% of those who had an opinion believed significant non-audit fees would lead to auditor independence being compromised.

It also showed that a large percentage of analysts felt the provision of services including corporate finance, asset valuation and management consultancy would compromise audit independence and judgement. Clearly this is an indication that those outside of the profession believe a problem exists. Analysts also stated that demerged consultancies should not be allowed to trade under the Big Five brand names.

Our second study reviewed the accounts of the FTSE 350, particularly the amount paid to auditors for both audit and non-audit work. That study revealed non-audit work accounted for 66.9% of the total fees received by auditors from their audit clients in 1999. Clearly percentages of that proportion will worry investors and place strain on the belief that Chinese walls will protect objectivity and independence.

Recently, Accountancy Age reported that certain Big Five firms were considering legal action against the SEC and its proposals. This seems a drastic measure to keep together diverse conglomerates.

The SEC’s insistence on a totally independent audit should be viewed as a positive step for the audit profession’s status. Splitting the audit arm from the consultancy work will provide the Big Five’s consultancy arms with more flexibility, whilst freeing them from audit regulations.

It will also leave the audit functions free of independence issues and objectivity fears. Further consolidation in a pure audit sector will then be possible and prices for this statutory and essential function will rise.

Large companies should according to Mr Chamier expect to pay a much higher price for truly independent auditing services. A price investors will no doubt consider worthwhile.

– David Haigh is chief executive of marketing finance consultancy Brand Finance.