Why the British approach works

The English ICA commissioned two reports, one on the guidance on auditor independence and the other on whether firms adhere to the guidance. The first report favours having fundamental principles supported by guidance, rather than a detailed code that would encourage a search for loopholes. It is very British: the principles allow you to tell what is or isn’t cricket.

Contrast that with the American desire to rule out anything that could possibly place independence at risk. That approach is not surprising in such a litigious country. An accountancy firm may be asked to split its business in two just in case a client’s shareholder or creditor might doubt an audit report and sue.

I prefer the British approach, so long as it works. But there remain three questions. Can the British ‘principles’ approach work? Does it work? And is it guaranteed always to work?

The Joint Monitoring Unit’s report on adherence to the guidance says that firms are mostly sticking to the principles. This does not mean that the principles are perfect. Some changes are suggested. But it does show that the ‘principles’ approach can work.

Does it work? We cannot tell. The rarity of qualified audit reports is no guide, because we do not know how many dodgy accounting practices are deterred by the mere threat of a qualified report.

Is it guaranteed always to work? No, nothing human is. Wanting a guarantee that nothing will ever go wrong would lead us back to the SEC’s strong line.

There is a trade-off here. Audit, tax and consultancy services are cheaper if they are all provided by one firm which gets to know every aspect of the client. But that does increase the risk that something will go wrong.

Is the trade-off a business judgement, or should it be guided by a moral principle that auditors must be squeaky-clean police officers? Answers on a postcard please.

  • Richard Baron is deputy head of the policy unit at the Institute of Directors.

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