The European Commission's Green Paper Audit Policy: Lessons from the Crisis shines a timely and glaring spotlight on the role of audit, says ACCA (the Association of Chartered Certified Accountants) today.
Roger Acton, director of ACCA Europe says: “Firstly, we are encouraged that the Commission states clearly that 'robust audit is key to re-establishing trust and market confidence; it contributes to investor protection and reduces the cost of capital for companies'. It is important that audit’s societal role is acknowledged. The Commission's Green Paper presents an opportunity for a fresh look at the role of audit and the ways in which it needs to evolve to maintain its value for stakeholders in the wake of the financial crisis.”
The Commission intends to hold a high-level conference in February 2011 involving a broad base of stakeholders such as investors, lenders, audit firms, analysts, regulators and other key players. ACCA has been holding such events around the world over the past 12 months and these have addressed many of the issues raised by the Green Paper.
Roger Acton says: “The Commission is looking at the role of the auditor and whether it needs to be extended. ACCA agrees that the role needs to evolve to take into account more forward-looking information, and for the auditor to give opinions not just on the financial statements, but also on areas such as the company's internal controls, corporate governance arrangements and the financial assumptions underlying the business model. By doing this, auditors will better meet the needs of stakeholders who are calling out for their views on the general economic and financial outlook of the company. This will help address the so-called 'expectations gap.”
Mr Acton continues: “We are also pleased that the Commission has identified the issue of greater communication by auditors to stakeholders. At the moment there is general frustration on the part of investors that the key issues are restricted for the eyes of the audit committee. Much of the comment that goes into management letters would be of great interest to stakeholders and the binary nature of the audit report is no longer sufficient. Ways need to be found to bridge this communications gap. Auditors need also to do more to demonstrate to stakeholders what they do - the audit report language is often defensive and too technical, which means little to lay observers.
“But it is clear from our events in Europe and further afield that liability reform is crucial if auditors are to take on these new responsibilities, and it is a little disappointing that the Green Paper has said relatively little about this.
“On the issue of audit concentration, ACCA agrees with the Commission that measures need to be explored which will overcome the barriers to smaller firms taking on large audits. We believe action against restrictive covenants here would help, along with liability issues being properly addressed. But we do not agree with the idea floated of 'downsizing' or restructuring so-called 'systemic', ie Big Four firms. We do not believe regulatory action of this kind is appropriate.”
At the smaller end of the market, the Green Paper raises the important issue of the type of assurance that is most helpful and needed by SMEs. ACCA agrees that assurance needs to be provided in relation to the scale and complexity of the business.
Roger Acton says: “The Paper acknowledges that SMEs get value from audit in terms of enhanced credibility of their financial statements but then adds that the process is a source of potential burden. It goes on to suggest that 'where member states want to maintain some form of assurance' a new type of service might be needed. ACCA is concerned at the notion of businesses having no assurance at all as this leaves shareholders exposed. But the current situation, where a great variety of non-audit reports exist in different EU states does not help cross-border trade and we would agree there should be a pan-EU, if not global, agreed standard procedure. This could be based on the International Federation of Accountants' existing standards.”
Another key issue mentioned by the Green Paper is regulation of auditors with where the EC proposes a Committee to reinforce co-operation at the European level, foster convergence in the application of rules and ensure a common approach to the monitoring of audit firms.
Roger Acton concludes: “We would support moves to harmonise approaches, share best practice and where necessary improve standards in member states. But if a pan-EU body is set up then we would argue that principles of good regulation mean that the actual monitoring of firms must be carried out by the national regulator. Ultimately, what ACCA wants to see is better, not more regulation.”
ACCA will be submitting a full response to the consultation by the deadline of 8 December 2010. ACCA has also run high-level roundtables around the world, from Poland to Singapore, in order to examine the role and the value of audit and to consider how it needs to evolve. Summaries of these events and other materials relating to the role of audit can be found online at accaglobal.com/.
ACCA’s chief executive Helen Brand is giving evidence to the House of Lords Economic Committee review of auditing on Tuesday 19 October.