ACCA (the Association of Chartered Certified Accountants) today welcomes many of the recommendations of the House of Lords’ Select Committee on Economic Affairs report Auditors: market concentration and their role.
ACCA is delighted that the Lords have recognised that audit adds value for businesses and their stakeholders. ACCA agrees with points made in the report that the role of audit needs to be strengthened and agrees with the recommendation that audit committees should hold discussions with principal shareholders.
However, ACCA warns that the Lords’ criticisms of IFRS (International Financial Reporting Standards) and its effect on audit quality are misguided and could have potentially serious implications internationally. Additionally, ACCA believes that aspects of the recommendations require further clarification.
“We welcome the report and agree with many of its observations and recommendations,” says Helen Brand, ACCA’s chief executive, who gave evidence during the inquiry. “We are particularly pleased that on several occasions, ACCA’s own recommendations and evidence have been taken on board and specifically referenced by the report. We would agree that more competition is needed in the audit market, but as a strong supporter of what audit can bring to business we are glad that the investors and other participants in the inquiry acknowledged the value and importance of audit in the economy.”
Helen Brand adds: “It is very pleasing to see that the Lords have recommended that the audit should expand in scope to provide broader, more up-to-date assurance on matters such as risk management, the business model, and the business review. ACCA also believes reform would do much to reduce the ‘expectations gap’ and meet stakeholders’ needs.
“The Lords also refer to our call for action on audit liability, which our own global research has shown is a deadweight on audit innovation. It is encouraging that the Lords have also heeded calls to address the issue of restrictive covenants. We strongly support the suggestion that these two issues – audit liability and restrictive covenants – be investigated by the Office of Fair Trading (OFT). Action in these areas will do much to increase opportunities for competition in the audit market.”
ACCA supports other observations made by the Lords. They have rightly rejected the idea of compulsory rotation and joint audits, both of which have been floated by the European Commission but which ACCA believes would actually do little to increase audit market competition. Proposals for risk committees in banks and more regular dialogue between bank auditors and regulators should also be supported.
However, there are certain recommendations and observations made by the Lords with which ACCA cannot agree.
Helen Brand explains: “We are most worried by the Lords’ conclusion that the introduction of IFRS has led directly to a reduction in audit quality. ACCA does not believe this to be the case.
“The Lords have quoted many eminent participants in the inquiry process who have disagreed with the Lords’ assertion. ACCA does not believe the banking crisis was predominantly caused by accounting issues and we are not convinced that IFRS provides less scope for auditors to exercise prudent judgement, as is alleged.
“IFRS includes an overriding requirement that the financial statements should present fairly the position and performance of a company. An audit has always been, and continues to be, more than a report on compliance with a set of accounting standards. The Lords have overemphasised the differences between UK GAAP and IFRS in this respect.”
Helen Brand continues: “It is important to note that the specific IFRS weakness identified by the Lords – around expected rather than incurred loan losses – is already being remedied. The recommendation that UK GAAP should be continued ignores the fact that the key accounting standards in UK GAAP – on financial instruments – are virtually identical to existing IFRS. Any shortcomings of the accounts and audits of banks should not be either a reason to deny global standards to other companies or a justification of continuing to impose on other UK businesses the extra costs of maintaining both systems.
“The criticisms made of IFRS are not helpful given that most countries have now committed themselves to adopting IFRS as the preferred reporting framework for listed companies, and the US is preparing to make its own decision as to the status of IFRS later this year.”
Regarding the Lords’ conclusions on non-audit services, Helen Brand says: “We disagree with the report’s conclusions. While we accept that there is a strong case for auditors to be excluded from internal audit work, we do not feel that tax advisory work should be included in any ban, and certainly not for smaller entities. Most companies will feel aggrieved at the prospect of having to take on another firm of advisors to do tax work, something that seems costly and unnecessary.”
Concluding, Helen Brand says: “Lastly, the report calls for a reduction in the audit requirement for smaller companies in order to ‘lower regulatory costs’. The Department of Business, Innovation, and Skills (BIS) has also recently suggested this, but both the Lords and BIS have failed to recognise that there would be a downside to removing external checks on small companies’ finances. Audit must not be so lazily confused with red tape.”