Auditors: Market concentration and their role - Economic Affairs Committee Contents


Supplementary memorandum by Professor Stella Fearnley, Bournemouth University (ADT 51)

  I am adding some additional comments to the evidence which I gave and also providing an update on the matters on which we were asked to provide further information.

1.  AUDITING AS A PROFESSION

  I add an additional point to Professor Power's evidence. Auditing itself is now subject to external independent oversight and discipline and therefore does not, on the face of it, meet the generally recognised criteria for a profession. However, all auditors have to be members of a recognised professional accountancy body to become auditors and therefore they have to adhere to that professional body's code of conduct, which is wide ranging. Audit, because of its high public interest and the economic damage that failed audits can cause, has a further set of constraints. However, if an auditor were to be struck off or disciplined by his or her professional body for misconduct, then that person would be unable to carry out audits as not being a fit and proper person.

2.  ECONOMIC DEPENDENCE

  Ethical Standard 4 (revised) issued by the UK Auditing Practices Board addresses fee dependence in paragraphs 25 and 33. Para 25 requires that the auditor of a listed company cannot be auditor of that company if the total recurring fee, including non-audit services, exceeds 10% of total fee income or 10% of the income on which the partners remuneration is determined.

  Para 33 requires that if the fee income as defined above exceeds 5%, the partner must inform the firm's ethical partner and those charged with governance ie the audit committee, about the matter so, if necessary, additional safeguards can be introduced.

3.  IFRS AND GLOBAL BARRIERS TO ENTRY TO THE LISTED COMPANY AUDIT MARKET

  Below I refer to our submission to the Committee in paragraph 8 in response to question 1.

  The drive for global accounting standards and the complexity of the standards themselves plays to the strengths of the larger firms and increases the barriers to entry to the global market for smaller firms.

  In order to enter this market, smaller firms need an increased level of technical expertise which they may not have the critical mass to provide.

4.  NUMBER OF SMALL COMPANIES THAT DO NOT HAVE AUDITS

  I am currently investigating where this information can be obtained and will come back you on it.

5.  IMPACT OF FAIR VALUE

  I attach four documents about the impact of fair value which the Committee might find helpful:

    — A speech and excellent slides presented by Lord Turner, the Chairman of the FSA in January 2010 in Chartered Accountant Hall about accounting and the economic crisis.[2]

    — A paper issued by Ernst & Young in 2005 about fair values which highlights some of the problems before they actually happened and refers to the US influence on the standards.[3] What this highlights is that the problems were well recognised before it all went wrong.

    — A very short letter from a US Fund manager to the US Financial Accounting Standards Board about his views of their proposals to extend the use of fair value accounting.[4]

6.  GOVERNANCE OF THE INTERNATIONAL ACCOUNTING STANDARDS BOARD

  I attach some comments I sent to the IASB about their governance consultation last year which highlight my concerns about their governance.[5]

14 October 2010




2   Not published here. Back

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4   Not published here. Back

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