The outlook for audit reform

aksaroya —  7 August 2013 — 1 Comment

By Aidan Clifford, FCCA, advisory services manager, ACCA Ireland 

The accountancy profession is fond of using Lord Justice Tope’s assertion that ‘the auditor is a watchdog not a bloodhound’. Whatever the characteristic of the animal, the European Commission has decided that audit in Europe is not fit for purpose and has set out on a torturous road of taking it to hell.

eu flags

As part of our EU presidency obligations, it now falls to Irish ministers and civil servants to lead the debate with their EU colleagues on the Commissions proposals.

In properly functioning business environments, audit is good for business, good for jobs, and yes, even good for small to medium-sized enterprises. However, we recognise that we don’t live in a perfect world, and that parts of the model could be improved. In this context, the Irish presidency starts with a flawed set of proposals, built on flawed judgement rather than business reality and, because of this, has a real challenge ahead.

Brussels, among a number of other proposals, wants to place restrictions on the provision of additional non-audit services; provide for audit only firms; require audit firm rotation after a fixed period; and encourage more cross border audit firms. Some proposals are more laudable than others, but they are all lacking empirical evidence supporting how much they might contribute to audit quality.

The proposals from the EU would change the role of the auditor from watchdog to something of a watchdog/bloodhound cross, but ACCA argues this in not enough. In many of the high-profile failures of late, there have been marked deficiencies in the operation of the audit committee and directors. Any new proposals would need to task the audit committee with communicating with the auditors on areas of audit risk, attach more responsibility to report directly to shareholders on the performance of the audit, and to assist in the appointment of the auditors. this is something ACCA strongly supports and is something that is happening in well-governed companies already.

ACCA would like to see the directors and audit committees fully trained up and competent to discharge their side of the audit function, with both the legal empowerment to perform the function and legal responsibility for failure to perform. The European Commission is attempting to retrain the dog, when in fact, at least some of the focus should be on retraining the owner.

The article first appeared in Accounting and Business, June 2013

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One response to The outlook for audit reform

  1. 

    I agree, especially on audit rotation, in light of reports from across the Atlantic that the regulators have emphatically refused mandatory audit rotation. While it intuitively feels a good idea, audit rotation needs to be backed up by demonstrated action on some audit concerns by Audit Commitees. Otherwise it will just be the same recommendations/concerns by different auditors not acted upon.

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