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FRC CEO calls audit profession defensive

The UK Financial Reporting Council chief executive Stephen Haddrill accused the audit profession of being defensive over criticisms about its role in the financial crisis.

Hadrill made the comments in the opening speech at the Auditing Special Interest Group’s (ASIG) 22nd auditing and assurance conference and added that as audit provides a public service required in law “it is reasonable that at times of financial crisis it should have to account for itself”.

At a time when the value of audit is being questioned and trust in profession is at an all time low, Haddrill said the criticisms show there is value: “we would, of course, have more reason to be anxious if nobody saw value in what you do”.

“It is good news that the importance of auditing is fully recognised and that the debate is about doing better, not doing less,” he remarked.

There was a surprising amount of support for change with many stating that unless the profession does acknowledge some responsibility and evolve there is a risk it could become ‘extinct’.

E&Y UK partner Allister Wilson said nothing has been done on a macro level so far to change since the crisis and “all we hear is defence of the status quo”.

Haddrill also called for more debate around what audit is for and what it can do as he said this has yet to be “debated sufficiently in the various reviews undertaken so far”.

He also covered the Sharman Inquiry into going concern statements, which have been the focus of auditors’ role in the crisis as the majority of UK banks’ directors statements were signed off despite then failing shortly after.

“Anyone reviewing the [Sharman inquiry] responses will see that there was substantial agreement about the rationale for the directors’ going concern judgement being properly spelt out at all times, not just in a crisis,” Haddrill explained.

“That the assessment is not just based on short-term factors, but all those that could cause distress to future success; and that the assessment process is built into the business planning system so that the risks to going concern from the business model are considered at the right time.”

Good behaviour

Sharman inquiry member David Pitt-Watson told The Accountant that the “view and process of risk which is part of the going concern that the auditor then views and can then be declared…is where the risk should sit”.

“It is good behaviours that we are trying to create here we are not saying that we can develop some clever model that can tell you whether you are a going concern or not this is something that needs to be the judgment of good people on the board trying to run the companies well…If an honest mistake is made then we have to allow that,” Pitt-Watson said.

Sharman’s report is due out next month and the FRC said it plans to consider the proposals in detail during the summer.

Other common themes during the two day event included risk reporting and risk assurance, the auditors’ report and communication.

“The quality of corporate reporting on risk is of vital importance as the banks seek to reassure investors about their stability in uncertain times and we look forward to a day when the capital markets, not the taxpayer, absorb all risks in the sector,” Haddrill said.

“It will take longer to get back to that position if there is not confidence in both the quality of the reporting of risk and the role of audit in providing assurance on risk.  Across the listed market this is improving, but it could still be better.”

‘Extreme’ lobbying

The European Commissions (EC) audit reform proposals were also scrutinised in a number of sessions and in a speech from the EC’s acting head of the audit policy unit, Arvind Wadhera defended the proposals saying “since the bank bailouts during 2007 it is not unreasonable for the EC to question how banks went down after clean going concerns were issued”.

Wadhera then went on to call the lobbying by accounting firms particularly the Big Four against the proposals, “extreme”.

Haddrill expressed support for some of the EC proposals, including on restrictions in bank covenants in favour of the Big Four and in allowing new sources of capital.

“[However,] we do not support mandatory rotation of firms every six years, but we do not like companies holding on to their auditor for a hundred years. From our perspective, the most important consideration is that more competition is achieved without compromising audit quality,” he stated.

The EC proposals are currently being reviewed by the European Council and Parliament before any are signed into law but Wadhera says the EC expects them to “show the same commitment”.

He said discussion at EU council and parliment level will continue throughout 2012.

ASIG is part of the British Accounting Association.

For a full report from the conference please see the May edition of The Accountant out soon.

 

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