ACCA published a paper that outlines ACCA's position on the key issues that have been raised in a number of high-level inquiries about the role of audit in several jurisdictions during 2010 and 2011.
In the UK, Brussels and the US the global financial crisis has sparked a series of high-level inquiries into the role and effectiveness of audit, while in Singapore, among others, regulators are actively engaging with stakeholders to assess how audit can be enhanced.
The European Commission’s wide-ranging Green Paper on audit will be debated in Brussels throughout 2011, and will eventually lead to legislation covering the European auditing profession. Michel Barnier, the EC’s Financial Services Commissioner, has already warned at a high-level summit in Brussels in February that ‘the status quo is not an option’.
In the UK, the House of Lords Economic Affairs Committee has conducted a highly critical inquiry into audit competition, which has led to a referral to the Office of Fair Trading on the basis that the complexity of the issues covered requires that they be fully examined by a better-resourced body than a Parliamentary committee.
Meanwhile, in the US, the Public Company Accounting Oversight Board has been examining the need for changes to the current auditor reporting model, and has consulted a variety of stakeholders. The US senate has also undertaken a hearing, in which regulators and standard-setters have been called to give evidence into the role of the accountancy profession in preventing another financial crisis.
ACCA accepts that policymakers and regulators have every right to ask tough questions on the role of audit in the global financial crisis and that the profession needs to respond appropriately.
Several of these issues, including audit competition, have been examined in inquiries in more than one jurisdiction, and this paper sets out ACCA’s thinking on some of the central questions in the international debate.
Audit concentration
In order to increase audit competition, ACCA believes policymakers need to take action on restrictive covenants and particularly on auditors’ liability. The use of covenants is a directly anti-competitive measure, while easing the burden of potentially catastrophic litigation will encourage new entrants to enter the large audit market.
Audit independence
ACCA rejects calls for the banning of non-audit services and for mandatory rotation of firms. ACCA believes that joint audits are ineffective but are the lesser of two evils, compared with rotation. Fuller disclosure by audit committees of the basis of their choice of auditor is recommended. ACCA backs an enhanced role for audit committees, though warns against over-reliance on them.
Expanding the role of audit
ACCA argues that audit should be enhanced to take on areas such as risk management, corporate governance and testing of the assumptions underlying companies’ business models. This would meet stakeholder needs more effectively, address criticisms of the narrowness of the audit role, and so help to bridge the ‘expectations gap’.
Audit committees
ACCA agrees that audit committees, acting independently from executive directors and management, can do much to provide additional confidence in the integrity of the accounting and auditing processes. But ACCA cautions that recent inquiries may have invested too much reliance in audit committees – they are usually small groups with limited resources and not everyone on them is a technical expert.
Going concern
ACCA would support reform of the current ‘all or nothing’ report to allow a more graded approach. Ways must be found to break the logjam, whereby any modification to a clean audit report can trigger immediate loss of confidence in a company by investors or credit providers.
Auditor/regulator dialogue
Regulators should build relationships with auditors that promote collaboration rather than separate working. Mutual trust and understanding are important drivers of effective communication, which is key to the achievement of each party’s objectives.
Audit of small entities
Ways of auditing small- and medium-sized enterprises (SMEs) need to be revised to ensure direct relevance to those entities. An internationally agreed range of assurance services for businesses not subject to audit is needed. But policymakers should not conflate audit with ‘red tape’. Audit adds value to businesses’ financial statements and makes it more likely that they will raise finance effectively.
International Financial Reporting Standards
ACCA rejects claims that the IFRS regime has led to a lessening of prudence or judgement in audit. While prudence as an accounting concept is not central to IFRS, the system demands that companies present their position and performance fairly. Criticisms of the accounting standards on this issue have been misplaced and their perceived effect on audit mistaken.
Full paper
© ACCA - Association of Chartered Certified Accountants
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