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A UK government committee has questioned how useful audit currently
is and said the process results in tunnel vision, where the big
picture is lost in a “sea of detail and regulatory
disclosures”.

The UK House of Commons Treasury Committee’s new report,
Banking Crisis: reforming corporate governance and pay in the
City
, examined the role that auditors played in the UK banking
crisis and how their performance could be strengthened in the
future.

The committee concluded auditors fulfilled their duties as
currently stipulated, but raised concerns and made suggestions in a
number of areas, including auditor independence and co-operation
between auditors and the UK banking regulator, the Financial
Services Authority (FSA).

Ban non-audit work

The committee suggested audit firms should be banned from
conducting non-audit work for audit clients and recommended the UK
Financial Reporting Council (FRC) consult on this proposal as soon
as possible.

Institute of Chartered Accountants in England and Wales (ICAEW)
chief executive Michael Izza told The Accountant he is
concerned that the report does not specify whether they thought the
independence of auditors should be looked at in the context of
banks alone, all financial institutions or the wider audit
community.

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“I have a bit of an issue if auditors were being told that they had
to be more independent for some audit clients than for others,” he
said. “Independence is independence. If, for example, a major audit
firm was auditing a bank and they had to provide a different
standard of independence to that bank than they had to provide to
Shell, or GlaxoSmithKline, I think that is a very difficult
intellectual road to go down.

“Do you end up with some audits being more independent than others?
That just doesn’t give me an easy feeling.”

Izza said it is important there is a factual base for any
discussions about auditor independence because a lot of non-audit
services benefit shareholders. Examples include reviews of interim
reporting and some work on Sarbanes-Oxley requirements.

“Some clarity over what is actually for shareholders and what is
for management should be the starting point for this,” he
said.

The committee also considered whether the role of the auditor could
be extended to provide greater assurance to shareholders.

The report accepted FRC chief executive Paul Boyle’s advice that
auditors are not well placed to provide additional assurance on the
risk management practices of financial institutions, and also
accepted an ICAEW recommendation that there could be better
co-operation between auditors and the FSA.

Izza argued that while risk management may not be something
auditors have the skills to opine on today, it is an area chartered
accountants understand well.

The ICAEW’s financial reporting faculty made a submission to the
committee that noted auditors had much more frequent contact with
the previous financial services regulator, the Bank of England,
than they do with the FSA.

“The FSA, when they came into being, took the view they would do
things themselves. There has been a massive regulatory failure
here,” Izza said.

“If the FSA, in their deliberations as to how they are going to do
things going forward, can see a role for auditors and auditors can
adapt their work or do additional things that are helpful to them,
I think that is something we should explore.”

The ICAEW’s financial services faculty has been involved in
discussions with the FSA now for several weeks.

Izza said that in general the audit profession needs to begin
discussing whether there are some ways in which auditors should
have a wider brief.

Graduated ladder of concern

The committee also recommended the FRC should consider replacing
going concern with a graduated ladder of concern, where auditors
could “transparently express an opinion on a bank’s future, without
triggering emergency action by the FSA”.

It also suggested financial reports should move to a more narrative
model.

“We would like them to read less like dictionaries and more like
histories,” the committee said.

“A useful approach would be to insist on all listed firms setting
out their business model in a short business review, in clear
jargon-free English, to detail how the firm has made [or lost] its
money and what the main future risks are judged to be.”