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UK should follow Australia's lead in accounting

Antipodean accountants have outlined an early warning system for financial crises from which the UK could learn

Good people, the Australians. They are always able to come up with forthright thoughts. That is just what we need after the great economic collapse. And partly, they can do this because their economy has not been as badly affected by the credit crunch as many others.

One of the real problems in the UK and across many major Western economies is that we were first startled by the crisis, then suffered through it, then were indignant about it – and now we have spent months looking for a scapegoat. If you have not been badly affected by the crisis, you can look rationally for ways to try to stop it happening again. And the results might be sensible.

With that confidence in our Antipodean friends, I recommend you read one of the latest missives from the Institute of Chartered Accountants in Australia on early warning systems to recognise oncoming financial crises. Some of its messages may sound familiar (the value of audit committees and what they can do, for example). But it is the context that gives the report resonance.

Australia escaped the worst of the economic storm. But it also has a rather more open audit world than the UK does. In the view of Lee White, the Institute’s executive general manager for members, “the Big Four monopoly issue is a European one”. He argues that the Big Four’s share of the domestic market is 90 percent by market capitalisation and that 1,800 companies have some 120 audit firms dealing with them in Australia – and he adds that those audit firms have greater freedom to pursue their independence.

In the UK, where the entire question of liability has always been sidestepped or ignored, particularly on the corporate side of the argument, Australia’s example would be good to follow. Proportionate liability exists in Australia and, according to White, “is a strong component of driving audit quality”.

What they are saying has a traditional Australian independence of thought about it, but it also has independence stemming from not being so scarred by the experience of the crisis. That means they can tackle things in a positive way rather than playing catchup like the UK is at the moment.

In their early warning system, the Australians recommend starting with the audit function.

“Communication between auditors and the audit committee is important, as is communication between the audit committee and the company’s stakeholders,” the Institute’s report says. “There is merit in exploring an enhanced role for the audit committee, including better disclosure of key information in the annual report, and an improved understanding of the role of audit.” This is followed by a short jog to audit committees: they need to help with the disclosure of future financial performance indicators; the components of the business model and the significant inherent risks to that model; and “the uncertainties and judgements that underlie its set of financial statements”.

This is the heart of any reform: the part of business that creates by far the most interesting parts of the audit and corporate governance process. This is where the issues that could give the public and stakeholders the best understanding of the company are to be found. Or as the report puts it: “These are typically the topics of greatest discussion between auditors and audit committees and attract the highest degree of audit focus.”

This is what needs to be out in the open and explained. If you could do that, you have the possibility of an economy-wide view of what is good and what is bad of the trends building up. Hopefully, it would be unmistakeable if things started to go horribly wrong again. All that is then required, as the report puts it, is to have regulators with the independence and courage to call a looming disaster and take evasive action if required. Easy.


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