Memorandum submitted by Mazars Neville
We are sure that many commentators have made
the point that the Enron collapse occurred in the United States
and therefore took place under very different standards and regulations
from the United Kingdom. Much comment in the public domain is
of course ignorant of this fact. In the public interest however,
it seems appropriate to be seen to examine the system of regulation
here to ensure that we are taking all reasonable steps to "prevent
The setting of accounting and auditing standards
and their application
We do not perceive substantial gaps in standards
in place. There is a mature, authoritative standard setting process
in this country and we believe that this process has earned the
respect of those who are required to follow the standards. In
setting standards, sight has not been lost of the importance of
judgement and of "substance over form". We believe that
this environment, as opposed to a detailed rules based approach,
gives us a firm foundation for the preparation and auditing of
The Financial Reporting Review Panel ("FRRP")
examines apparent departures from the accounting requirements
of the Companies Act 1985, including applicable accounting standards,
and if necessary seeks an order from the court to remedy them.
Preparers and auditors seek to learn from the decisions of the
FRRP in exercising their professional judgement. However, this
body is clear that it "does not make general statements or
offer advice on the application of accounting standards or the
accounting requirements of the Companies Act 1985". Maybe
it, or a similar body, should provide this service in addition
to threatening a rap on the knuckles retrospectively.
We have seen little recognition by commentators
of just how complex financial reporting standards have become
in recent years. Company directors increasingly rely on their
auditors to help them in applying new standards. It is worth exploring
the merits of providing all concerned with an additional independent
viewpoint prior to financial statement publication.
Competition in the audit market
Shareholders should have a genuine choice of
service providers. In any marketplace a limited number of dominant
players is not good. It does not drive competition in standards,
service levels or technical excellence and can engender complacency
and create a set of audit standards that are not sufficiently
As greater competition is good for the market,
clients and investors alike, each of those groups should recognise
that they need to take a long-term stance in order to encourage
competition into the market. There have been various suggestions
as to how the market can create more competition, for example:
adding an Audit Commission-style
layer of regulation into private sector audit;
We do not believe that there is sufficient support
for the forced regulatory approach of the first of these and we
fear that the second suggestion is fundamentally flawed. Such
a system could seriously affect an auditor's judgement in different
ways depending on the point in the period of the audit appointment.
In addition, research suggests that "audit failure"
is more likely in the first year that an auditor is appointed
when business knowledge is still being accumulated.
At Mazars Neville Russell, we strongly believe
that introducing a system of joint audit to the UK market would
go a long way towards solving the epidemic problem of competition.
Joint audit is a system in which each publicly listed company
is compelled to have two professional firms audit its accounts.
The firms audit different aspects of the company but both firms
take joint responsibility for expressing the audit opinion. Having
two sets of auditors means that one can support the other against
a client in those unusual but high-risk situations where the client
is taking an unnecessarily aggressive approach in its accounting
In the long-term, joint audit guarantees the
standards of objectivity, independence and excellence that the
capital markets need to maintain their credibility. In the short-term,
joint audit enables new entrants into the marketplace because
mid-tier firms are able to work alongside "Bigger Four"
audit firms, as is the case in France. This may look like a way
of putting more cost into the audit process for businesses, yet
the benefits revolve around the protection of shareholder and
Joint audits should be introduced and encouraged
to demonstrate rigour, independence and encourage market competition
with new entrants in to the listed company audits market. This
is particularly relevant post Andersen.
Provision of other services
The argument is that under the current system,
an audit firm that derives a substantial amount of business from
both the audit and the other services it provides may be less
challenging in the audit process.
We admit that the audit profession as a whole
has done a great disservice to the value of audit by using it
on too many occasions as a loss-leader to gain access to lucrative
consulting contracts or other non-audit services. This approach
has had an inevitable knock-on effect among clients, many of whom
have been led to believe that the cost of an audit is a necessary,
regulatory evil and that value-for-money equates to obtaining
the cheapest credible service available on the market.
We would like to share with you two actions
that we have taken in our firm that we would commend to others:
Taking away from the appraisal system
judgements that reward audit partners for selling non-audit services.
By switching audit partners' attention from generating fees for
other service areas, they focus on the quality of audit work and
the competencies and standards that go with producing a quality
audit. Ultimately, how audit partners are appraised has got to
tie in to how they are rewarded as individuals and this, in turn,
has to be built around the kind of outputs audit firms want and
that the investment community needs.
Fostering lifelong audit training.
The accountancy profession has moved away from specialising in
audit as it has added new branches of consultancy to its service
offering. We have reached a stage in many firms where auditors
are not trained and valued as specialists and where those working
in accountancy firms have seen their audit training as a means
to an end, rather than as something that is preparing them for
their chosen specialism over the long-term. We still believe that
audit is our firm's core specialism and we expect people to maintain
their specialist skills.
The regulators of the profession need to make
it clear that these sorts of actions are expected.
Also with regard to ensuring the quality of
audit, we support the initiative of the International Federation
of Accountants (IFAC) and the Forum of Firms and their proposal
to introduce an international peer review and establish consistent
audit standards world-wide. We are playing our part in this initiative
and we hope that the doubt cast on the peer review system as it
works in the USA will not cause this international initiative
As part of an effort to encourage improved corporate
governance, IFAC has set up a task force to make recommendations
on the role and composition of audit committees and how they should
report to shareholders. Although much has been written in the
past about audit committees in terms of how they should be set
up and what they might discuss, there has been little real practical
help for committee members on how to assess the quality of the
audit work performed. There is scope for a UK initiative to build
on what IFAC produces if it does not itself meet this need.
Risk reporting has had its profile well and
truly raised by Turnbull and others but we would question whether
the public reporting of risks has substantially improved. When
financial statements have been prepared and audited directors
and auditors should be satisfied that the investors have the information
they need to make a realistic assessment of the risks attaching
to their investment. Current regulation would allow much still
to be hidden.
Company law review
There is much that is to be welcomed proposed
in this review and we would urge government to speed the process
of this review as much as possible. We understand the complexity
of the legislative process but suggest that increased resource
needs to be applied to this project to modernise our company law.
We hope that these few comments are of interest
and assistance to the committee. If clarification of any point
would help them please contact Kim Hurst, the firm's audit compliance
partner, in the first instance.
21 June 2002