Like early '80s electro-pop revivals, some issues in accountancy seem to come up once every few years, fade away and then a new generation discovers them. The supposed threat to the independence of audits carried out by firms who provide non-audit services to the same clients is one of them.
In the recession of the early 1990s, firms allegedly 'low-balled' – ie cut their audit fees in order to get a foot in the door for more lucrative non-audit work. Then in 2001, following Enron and the demise of Andersen, the argument came up again. How can firms possibly perform properly independent audits when their eyes are fixed on the bigger consultancy prize?
And now, in the credit-crunched late noughties, the issue is back. In May, the UK Treasury Select Committee, after its open hearings into the banking crisis, declared: 'We strongly believe that investor confidence and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work for the same company, and recommend that the Financing Reporting Council consult on this proposal at the earliest opportunity.' A similar conclusion was reached by an earlier Committee hearing into the Northern Rock debacle.
The FRC has, via its Auditing Practices Board, duly just issued a consultation paper and fascinating reading it makes. The APB observes that the Select Committee's recommendation was based on the views of 'certain representatives of the investor community' and 'particular commentators', all of whom strongly believed that auditors do not stay independent in the face of non-audit riches. These individuals are not named but at least some, it would be reasonable to say, merit the title 'frequent critics of the audit profession'.
The APB goes on to give a balanced analysis of the issue, but the reality is that the critics have a much easier job arguing their case than the firms do in asserting that their audit independence is not tarnished. This is why politicians tend to seize on this argument every few years.
The APB rightly laments the lack of evidence used in the arguments – 'these views are based predominantly on the perceptions and opinions that different stakeholders hold, and not a proven track record linking audit failures with a lack of objectivity'. ACCA has noted that there is a need for more evidence and research into the value of audit in promoting business confidence – but also believes that the skills of auditors bring value to business.
But in fact, the APB does come up with some key facts and figures, courtesy of Financial Director magazine, which shows a dramatic decline, since Enron, of the ratio of non-audit to audit fees in listed company accounts. From a peak of 191% in 2002, the figure plunged to 71% in 2008. In a debate where more heat than light tends to be generated, these are telling figures. A combination of extra regulation and market development seems to have come up with an answer.
ACCA does not believe a complete separation of audit and non-audit services is either possible or desirable. Some services are closely related to audit, while the extra insight of the incumbent audit firm into the business brings quality and efficiency benefits that businesses would not wish to lose. For SMPs, their ability to offer wide-ranging services as business advisers is of proven value to SMEs, a view supported by research.
But there is also a wider debate. We believe audit training is a crucial part of being an accountant and a blanket ban on the provision of non-audit services to audit clients would start to position audit as a specialist activity, rather than a central part of business governance, adding wider value to business leaders.
This would not help bring talented people into the profession. It would be a brave person to bet against the independence issue being revived again, circa 2018, but let us hope that, by then, there are still large numbers of firms providing a wide range of services.
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