PUBLIC AFFAIRS AND MEDIA RELATIONS BLOG - Veena Hudson

Audit and the financial crisis

It is right that the accountancy profession comes under scrutiny for the role that they may have played in the financial crisis, and that account preparers, standard-setters and auditors should all learn from the events of the last year. The accountancy profession has to consider what it can improve to ensure the current circumstances are not repeated in the future. It is no use the global profession signing a clean bill of health for itself at this time without acknowledging that there is also scope to consider what it can improve.

ACCA believes that, as famously stated in Re Kingston Cotton Mills case in 1896, by L.J. Lopes of the Appeal Court : the auditor is:

‘…a watchdog but not a bloodhound'.

However, there is scope for the profession to look at wider areas of assurance. A review of the business model and risk profile of the organisation would be one area to consider.

Above all, the profession has to acknowledge the expectations gap which exists and consider ways of improving education among those who rely on the audit as to what it can or cannot achieve.

Audit instils discipline, financial rigour, better corporate governance and can deter fraud. It is part of the operating fabric of the economy, and the success of capital markets is dependent on there being a competitive and stable audit market. However, there is much evidence showing that the public around the world and other users of financial statements do not understand what the role of audit is. Indeed, many believe that the role of an auditor is to detect fraud and error in financial statements.

How to resolve this issue has been the subject of much debate. Possible ways forward include:

• broadening the role and responsibility of auditors in the areas of fraud detection
• further strengthening the independence of auditors
• improving financial disclosure
• providing wider education to the public and users of financial statements on the limitations of an audit

The financial industry and all involved in it need to learn the hard lessons from the past year and be bold enough to make the changes needed to climb out of the financial crisis – and make sure the mistakes made are not repeated.

A word of warning on environmental taxation

Government borrowing has rocketed in 2009, due to bank bailouts, currency stabilisation measures and continued weakness in tax revenues, resulting in sharp rises in public deficits and debt. Governments around the world know that they have to tackle these issues quickly.

As a result, many governments are looking at environmental taxation as a possible way to make up the shortfall from declining tax intakes. A word of caution though: before they do this, they will need to ensure that business and their electorates support this approach and are able to see what the environmental taxes are achieving. Government and policy makers have to maintain the trust of business and the public by striking a balance between the need to raise revenues and the environmental objective underpinning the policy.

There is also a need for global coordination of this kind of policy. If environmental taxation lacks international coordination, it will not impact global pollution levels, as companies will simply relocate and move the pollution problem with them. In this instance, the environmental taxation will be revenue-raising without achieving environmental goals. An additional frequent complaint by business is that, if measures such as these are implemented unevenly, in one country and not another, it leads to a loss of international competitiveness. There therefore has to be global coordination to maximise the impact of environmental taxation, avoid a loss of business competitiveness, and to reduce the likelihood of businesses changing location to avoid the tax.

Politicians should not see environmental taxation as a panacea. It is not possible that it will both solve the environmental crisis and raise significant income over the long-term. This is because a system aimed at reducing what it is taxing, if successful, will destroy its own tax base. Therefore the way forward may be through a well balanced and broad tax base, as well as relying more on regulation to drive down pollution. Environmental taxation should be seen as one tool to be used alongside other policy measures including regulation, voluntary agreements and other instruments.
 
In all of this, the design and implementation stages of environmental taxation are key, both to ensure that the measures are having the desired environmental impact, but also to ensure that business is able to continue to operate effectively. Politicians need to ensure that they consult widely before a policy decision is taken to make a change or introduce a new tax and throughout the design and implementation stages, both with business and with tax professionals. Governments also need to ensure that the implementation, monitoring and analysis procedures are as thorough as possible, to improve the transparency and effectiveness of such taxes. Where unintended consequences occur that may damage business competitiveness, governments must also ensure that such consequences can be addressed as quickly as possible.

The global business community understands that ‘business as usual’ is no longer an option. Scrutiny of their environmental performance will only increase in the future and all have a duty to play their part in moving to a low-carbon economy. But businesses need policies that are transparent, clear, credible and certain in order to achieve carbon reduction goals.
 
Finally, the pursuit of economic growth at the cost of everything else cannot continue. Governments should respond to the recession by implementing measures that will encourage environmental investment and ultimately, a more sustainable approach.