ACCA: House of Lords Economic Affairs Committee’s report on auditors

31 March 2011

ACCA welcomed many of the observations and 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 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.

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. ACCA does not believe the banking crisis was predominantly caused by accounting issues and they are not convinced that IFRS provides less scope for auditors to exercise prudent judgement, as is alleged. Helen Brand, ACCA's chief executive says: "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."

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, 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 advisers to do tax work, something that seems costly and unnecessary."

Concluding, 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."

Press release

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