FRC chief calls for audit overhaul

The head of the UK accounting regulator has said that it is time to review the value of audit in the wake of the financial crisis.

Chief executive of the Financial Reporting Council (FRC) Stephen Haddrill says that the crisis, during which the role of auditors came under the spotlight, should lead to the function of audit being re-examined. “Just when audit is needed more, the impression is growing that it is delivering less,” he adds.

Haddrill made the remarks at the Institute of Chartered Accountants of Scotland’s Aileen Beattie Memorial Event in London at the end of April. “Audit is a key part of high quality governance,” he told the audience.

“The auditor sees the company’s approach to risk. The auditor challenges management’s judgement on the financials. The auditor reports to shareholders on whether the company is providing a true and fair view of the business. The investor only sees the tip of the iceberg of work. But nevertheless investors are relying on that work being done,” explained Haddrill.

The Treasury Select Committee has heard from various figures within the industry over the past year – Haddrill included – in order to ascertain whether there was a failure of oversight on the part of the audit profession during the banking crisis. While no-one has accepted formal responsibility, there has been a general acceptance that audit can tighten its procedures in the hope of avoiding a repeat.

Haddrill also said that the pre-eminence of the City as a financial centre meant
that audit must be seen to provide full oversight in order to reassure international equity investors.

“Overseas investors are taking a larger share in the equity of our markets. So as influence is lost, good corporate reporting and strong auditor oversight become all the more important,” he says.

The FRC expects to publish its thoughts on the subject later in the year. Michel Barnier, the new European Union internal market commissioner, has also said that the role of auditors needs closer scrutiny, and announced the process will start with the publication of an EU green paper on the subject in the autumn. That will most likely be a broad discussion document used in Brussels to pave the way for more specific legislative proposals.

Debate welcome
The Big Four accounting firms said they welcomed the debate on how the audit profession can better serve the needs of investors, especially on a global scale.

John Flaherty, assurance leader for the UK & Ireland at Ernst & Young, said: “It is clear that there is a desire to explore how audit may be enhanced.”

He added that “in the same way that regulation needs to have a global approach, a global solution to the future of audit has a much greater chance of meaningful and lasting impact”.

Richard Sexton, head of assurance at PricewaterhouseCoopers, says that “investors tell us there is a high level of confidence in the audit, although they and we recognise that its current scope is narrow. The time is ripe for a full debate on the whole reporting model and the role the audit should play in it. Pricewaterhouse­Coopers is determined to play a key part in that debate.”

Oliver Tant, UK head of audit at KPMG, believes the the audit model is “working, but in the light of recent events it may be that the auditor could do more. Rather than talking about restricting the role of the auditor, the debate should be around what more the market can gain from the auditor’s knowledge and skills.”

Recommendations
FRC chief executive Stephen Haddrill made several complaints against the current usefulness of audit. The key faults were:

Accounting standards have allowed management more discretion in the valuation of assets, which means that these values that are hard to pin down for complex instruments.

The role of the auditor has become more confined – everyone with an oversight role has concentrated on their own job, rather than sharing information with other parties that would best serve a wider objective of financial stability.

The market has not set higher expectations of what it wants from external audit – instead, it has applauded lower audit fees rather than higher quality.

Haddrill said that the areas he would like to address include:
1 Achieving a strong alignment between the auditor and the interests of the shareholder
2 The question of whether change is needed to make audit reports more useful
3 Considering whether more information about risk needs to be provided at the front of audit reports, and if the auditor should provide greater assurance
4 If auditors can give more help to regulators and avoid conflicts of interest in doing so.

Further reading
To read Stephen Haddrill’s speech in full, click here

The Treasury Select Committee’s recent sessions on the role of audit