The provision of non-audit services by auditors

Comments from ACCA to the Treasury and Select Committee, 2010.

General comments 

ACCA welcomes the opportunity to comment on the consultation on the proposed revised Ethical Standards for Auditors. We recognise that the consultation was triggered by concerns expressed by the Treasury Select Committee about the audit of certain public interest financial institutions, and this consultation is therefore concerned mainly with listed companies. This is a 'think big first' approach, and there is always a danger that practices for larger entities get cascaded down to smaller ones. ACCA prefers a 'think small first' approach and, in our comments below, we should like to draw the APB's attention to matters where smaller entities should be treated differently.

We note the consistency in the views of respondents to the October 2009 consultation, in that there should be no outright prohibition, and there should be no major change to the conceptual approach.

It is widely held to be the case (but particularly among investor stakeholders) that the provision of non-audit services is not a significant issue in addressing the external auditor's independence. Rather, the issue is one of perception - to be addressed through improved transparency. Therefore, we are pleased to have the opportunity to comment on the current consultations of the APB and the FRC together.

Much of the content of the proposed revised Ethical Standards is applicable to listed and other public interest entities. As indicated above, ACCA would prefer the Ethical Standards to address the issues from a 'think small first' point of view, with an emphasis on fundamental principles, and examples of appropriate courses of action in specific situations (including those involving public interest entities).

The importance of this approach is well illustrated when considering the provision of internal audit services. 'Internal audit' covers a wide range of activities. At one end of the spectrum, it might refer to an audit of the complete system of internal control, across an organisation, throughout the year; at the other end, particularly within smaller entities, it is likely to refer to an ad hoc project, which may have arisen as an extension of the external audit process, to address a particular aspect of business risk. For this reason, it is not appropriate for there to be a blanket prohibition on audit clients procuring internal audit services from their external auditors. For smaller entities, this Page 3 may be the only cost-effective means of obtaining the service and obtaining objective assurance concerning business risk. This highlights the need for a 'threats and safeguards' framework for resolving objectivity issues to remain paramount at all times.

While not prohibiting the provision of internal audit services by the external auditor, a threats and safeguards approach would have the effect that, for listed companies in particular, internal audit services would not be provided by the external auditor, other than in exceptional circumstances. This would come about because the same fundamental ethical principles apply to all companies, but there would be clear responsibility on audit committees to consider the justification of procuring these services from the external auditor, together with clearly identified policies and robust disclosure requirements.

In the absence of a 'think small first' approach, we believe it is essential to consider any prohibitions arising from the revised Ethical Standards from the point of view of a non-listed company audit. In such cases (where there is likely to be less public interest), a threats and safeguards approach to independence will be more relevant and more effective and, therefore, it is appropriate to make separate provisions for such engagements within the revised Ethical Standards.

Specific questions 
Our comments to the specific questions of this consultation are presented in the following PDF