Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum submitted by the Law Society of Scotland

  I refer to the Treasury Committee's above inquiry and to my letter of 5 April 2002 in that connection.

  I understand that the deadline for submissions to the inquiry was 5 April 2002. However, as you know, the Company Law Committee of the Law Society of Scotland ("the Committee") had not had the opportunity to meet to discuss the matter prior to that date. The Committee has since met on 14 May 2002 and I write now to bring to your attention the Committee's views on this issue either for inclusion in the inquiry evidence, if that is still possible, or for future reference should the inquiry procedure into this extremely important matter be continued. As you will see, the Committee has focused on the controls exercised through the audit process.

  The Committee would first emphasise the importance of drawing a distinction between the US auditing process and the UK system, which is quite different. In particular, the Committee considers that the UK system of certification of accounts as giving a "true and fair view" of the company's status can provide a greater protection for investors than a system of detailed regulation as to matters which require disclosure, such as operates in the US. The Committee considers that greater emphasis needs to be placed on the professional view of the auditor than on the creation of a system of detailed regulation as to matters which require disclosure, which may leave investors no better informed as to the salient points of the audit.

  The Committee is also aware of a gathering movement towards a separation of the "auditing" and the "advisory" function of accountants. The Committee acknowledges that such a separation would provide a safeguard from the danger of an auditing accountant being influenced by the financial benefit to his of her firm of any advisory work also being carried out for the audited company in what is, essentially, a conflict of interest situation. However, the Committee would point out that such a separation would also have disadvantages, notably in that it would not allow valuable experience gained by accountants through advisory work to inform the auditing process. Moreover, the effect of such a separation will be felt more greatly by companies of a comparatively smaller scale, in particular in relation to the financial burden, which would thereby be placed on them. The Committee considers, therefore, that if audit/advice barriers are to be erected, the question to be addressed is how can it best be ensured that the advantageous features of the present system are retained whilst eliminating, so far as possible, the interest conflict in a situation as outlined above.

  Also with regard to the interplay between the audit/advisory functions, the Committee notes that the financial rewards attached to advisory work are greater than those for auditing work. Moreover, many accounting firms use auditing as a training ground for accountants, rather than as an area of work for more experienced accountants. The Committee submits, therefore, that the status and remuneration of auditing work need to be raised, whether the auditing/advisory function are separated or not. The issue of the cost of professional indemnity insurance for auditing work, should it be separated from a firm's advisory work, will also have to be considered.

  I trust that this is of some assistance to the inquiry. If you would like to discuss this further, please do not hesitate to contact me.

16 May 2002

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