ACCA Makes the Case for Auditors Ahead of FRC Audit Review

It’s time to open up the audit black box, says global accounting body.

London, United Kingdom, July 05, 2010 --( ACCA (the Association of Chartered Certified Accountants) has held a series of roundtable events bringing together investors, banks, auditors, regulators and other stakeholders in the UK and internationally as part of its activities concerning the future of audit. These are unveiled today ahead of the publication of a review by the Financial Reporting Council (FRC) into the role of audit.

Ian Welch, Head of Policy, ACCA, says: “Auditors largely escaped attention in the first phase of the credit crunch and its aftermath. This respite is now over and the profession is facing searching questions from regulators and commentators. ACCA still believes that qualified auditors, whose training engenders qualities of professional scepticism and independence of thought, have a key role to play in instilling confidence in business. So to play our part in finding ways the value of audit can be enhanced, we have gone to find out first-hand stakeholders’ views in different markets.”

In its recent paper, Restating the Value of Audit, ACCA argued that the time has come to consider enhancing and expanding the role of the auditor. Among a number of new directions that the audit function could usefully take in future, auditors could add value by addressing and reporting on matters such as the assumptions underlying companies’ business models and the effectiveness of their risk management practices. And the effectiveness of corporate governance structures - the catastrophic failure of which ACCA considers lay at the root of the financial crisis – must now also come within the scope of audit. As shareholdings in plcs become more dispersed, so the role of audit is more important as these diverse investors need an auditor to represent their interests.

The roundtable events also highlighted the importance of independent assurance for third parties. Audit is clearly valued by ratings agencies and banks in lending decisions - so in an era where everyone is worried about lack of lending to SMEs, ACCA believes it is fair to conclude that less audit equals less lending. ACCA considers that while the focus in audit will always, inevitably, be on its relevance to large businesses, we must not forget the needs of small entities. They believe that stratification of the audit according to scale and complexity, 'unbundling' the audit product from its lengthy checklists where appropriate, and focusing on agreed areas of concern or risk to the business, would be a good way forward.

The value of audit, it has also been argued at the roundtable events, is that makes companies and directors accountable for the statements that they make. This gives comfort to shareholders. There are important secondary benefits from audit in terms of the discipline it imposes on companies, the deterrence of fraud, and comfort on going concern, all of which would be lost if there were no audit. And it should be remembered that if one sizeable local company goes down, another 50 could be affected – so the role of audit in society and the wider economy is beneficial.

Discussions also centred on the need for communication to be central to audit professionals’ efforts if the value of their trade is to be appreciated.

Ian Welch explains: “We must now address the issue of communicating to stakeholders more of the considerable work which goes on behind the scenes into an audit opinion. Directors and audit committees see this effort but the investors who are paying for it do not. It is clear from our discussions that the current binary nature of the audit report is no longer sufficient to meet the needs of shareholders. One event participant used a literary analogy: in Douglas Adams’ book The Hitchhiker’s Guide to the Galaxy, a computer reveals the answer to the ultimate question of Life, the Universe and Everything to be 42 - but without giving any indication as to how it arrived as this figure. Similarly, audit reports show an answer, but without letting the reader see the working out behind the conclusion. This needs to change.”

ACCA believes the audit profession will be willing to respond to the challenge of an enhanced audit role - which may ultimately have to adapt to more frequent or real-time reporting of financial information - but the quid pro quo for assumption of new responsibilities has to be a resolution of the liability issue.

Ian Welch concludes: “It is clear from our events that the audit liability issue must be addressed as this has a deadening effect on innovation. The firms take on a wider role in their auditing of public sector clients - rather than just assessing financial statements firms examine aspects of governance and arrangements to secure value for money for taxpayers. It can be no co-incidence that the risk of litigation is lower in this sector.

“If this outcome can be achieved as part of the wider enhancement process we believe that we will create a more confident and supportive audit profession which will help economic recovery: it is in all our interests to bring this about.”

Hannah Smith
+44 (0)20 7462 8900