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

Memorandum by the Association of Chartered Certified Accountants (ADT 4)


  ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management.

  We support our 140,000 members and 404,000 students in 170 countries, helping them to develop successful careers in accounting and business, based on the skills required by employers. We work through a network of 83 offices and centres and more than 8,000 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote appropriate regulation of accounting and conduct relevant research to ensure accountancy continues to grow in reputation and influence.

  "Audit and Society" is one of ACCA's four thought leadership themes. We have 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. We have a website containing summaries of these events and other materials relating to the role of audit which can be found here:


  ACCA agrees that the concentration of the largest audits in the world into the hands of four global providers has introduced a greater risk to the overall provision of audit and assurance services at the large end of the market.

  ACCA believes that there is a risk that one of the Big Four accounting firms ("the Big Four") could fail, and we are supportive of efforts to develop more competition in the market. If there were to be a failure of one of the Big Four, there would be serious repercussions for the capital markets, investor confidence and more widely.

  We believe that there are two major considerations in this debate:

    — a risk management issue, relating to dealing with the current consequences (real or potential) of there being only four suppliers serving, to a predominant extent, the large end of the market; and

    — a competitiveness issue, ie whether shareholders would be better served, in terms of quality and value for money, through having a wider choice of auditor.

  ACCA believes that a market with greater competition and choice would be in the public interest and would serve the interests of shareholders better. We are keen to see the Government foster opportunities which would enable other firms to "move into" the large-end audit and to ensure a level playing field. With this in mind, we believe that action to end restrictive covenants[1] and to reform the law on liability should be considered as priorities. Should effective action on these issues be taken, we would expect those large audit firms outside the Big Four to respond and show an active interest in procuring listed company audit work.

  Direct intervention in the market by, for example, forcing the firms to downsize or break up, would not in our view be appropriate. Such intervention could have unintended consequences (for example, forcing one of the large firms to pull out of audit altogether).

  The failure risk aside, ACCA does not agree that the simple fact of there being only four major firms in the market is likely in itself to lead to threats to objectivity on the part of those firms' audit work. The incentive for firms to offer a high standard of audit service is that their reputation and business could collapse very swiftly (as it did in the case of Arthur Andersen) following any allegation of deliberate collusion/falsifying or covering up the audit trail. Firms have every incentive to give the best advice they can. Furthermore, key principles such as objectivity, integrity and professional due care are enshrined in the ethical codes which professional accountants sign up to.

  In terms of the debate on the future role of the auditor, ACCA is concerned that there continues to be an "expectation gap" between what the auditor is actually required to do and what many lay people, including shareholders and observers, think the auditor should do.

  While we do not believe that the audit model is "broken", we consider that the audit needs to evolve in scope so as to retain its value for shareholders, clients and other stakeholders alike. And as the audit role evolves, we need to look not just at cash flow and going concern but at how auditors can engage more with companies' forward planning activities.

  ACCA does not believe a separation of audit and non-audit services is either possible or desirable. There appears to be no discernible demand in the investment community for such a split, and we have we seen no conclusive evidence that the current framework, with its independence safeguards and new ethical standards, is failing in practice. Furthermore, we believe that quality of services offered to businesses could suffer if artificially divided in this way, particularly at the smaller end of the market.


1.   Why did auditing become so concentrated on four global firms?

  Concentration in the market has been at this level for some years, and the market dominance of auditors PwC, Ernst & Young, KPMG and Deloitte, which audit most of the world's biggest companies, is a matter of concern for regulators and politicians alike in the UK and more widely.

  The group was the Big Eight until the 1980s. It became the Big Five following a series of mergers, prompted by the trend towards globalisation and the need for these large firms to be able to offer worldwide service. Each of what we currently know as the Big Four actually comprises a network of national firms which operate under a single umbrella, and which constitute a globally recognised brand.

  The Big Five became the Big Four following the collapse of Arthur Andersen in 2002-03 in the aftermath of the Enron scandal.

  It is unlikely that the Big Four will ever merge with each other due to competition law. But the impact of one, let alone more than one of the Big Four collapsing, or deciding to leave the audit market, would have serious repercussions for the capital markets, investor confidence and more widely. It would also mean that regulators would feel compelled to make exceptions to the current auditor independence rules.

  Failure of one of the Big Four is certainly a risk. It is possible that this could be caused (as in the case of Enron) by a failure outside the UK. International dialogue is therefore necessary, as this is ultimately an internationally-interconnected issue.

  ACCA supports the FRC's efforts to develop more competition, including providing new guidance for companies' audit committees and increasing the level of representation of non-Big Four firms on regulatory and professional bodies.

However, it should be acknowledged that there appears to be little appetite for change in the UK's audit market, particularly from the shareholder community.

2.   Do economies of scale make it too difficult for smaller firms to compete?

  While smaller firms may have the capacity and ability to handle larger audits, they may not be given the opportunity to do so because banks invariably include requirements in lending agreements for listed companies to use one of the Big Four.

  Large public companies also often have internal strictures, or "restrictive covenants" in place that state that only the Big Four audit firms are authorised to provide them with audit and other services. The result is that large companies (FTSE 350) often have little alternative but to use only the Big Four accounting firms and smaller companies are therefore locked out of the top-heavy market. Currently only one of the FTSE 100 companies is audited by a firm outside the Big Four.

  There is no one, clear reason why shareholders put in place restrictions which only allow the appointment of certain firms—it is possible that it is a relic of past prudence. The concentration may be due to market misperceptions about audit firms' capabilities, but there are also high barriers to market entry that make it difficult for smaller firms to challenge this status quo. Furthermore, there is much evidence to show that companies change their auditors very rarely. Of those that do change audit firms, in most cases, they move from one of the Big Four to another rather than to a mid-tier or other audit firm.

  Of course, there are also reputational issues, with many large companies viewing it as the safe choice to use one of the Big Four. The significant geographical coverage of the Big Four is also useful for global companies and is usually not paralleled by the mid-tier firms. However, a number of firms immediately outside the Big Four would argue they do have the capability and capacity to perform large-end audits.

  The restrictive covenants that prevent companies from using other audit firms would become a serious problem if one of the Big Four were to collapse, as they would not then be able to use one of the mid-tier firms.

  ACCA believes that a market with greater competition and choice would be in the public interest and would serve shareholders better.

  There is a case to be argued around the "environment" in which the audit is provided. Government can promote the right conditions for business to flourish and this holds true for accountancy and audit. Opportunities should be fostered which would enable other firms to "move into" the large-end audit and to ensure a level playing field.

3.   Does a lack of competition mean clients are charged excessive fees?

  ACCA does not have sufficient evidence to comment on whether the fees charged by the Big Four are "excessive" in the context of the scale and complexity of the services provided, however, it is logical to conclude that insufficient competition may lead to higher fees being charged. On the other hand, as market leaders performing the largest audits, it is possible that the nature of the services being provided will lead to relatively higher fees.

  ACCA believes, however, that price competition is a major factor in engendering auditor independence. Prior to the 1980s audit firms were not allowed to advertise their services and take part in bidding competitions for contracts. Competition between the accounting firms greatly increased when these restrictions were abolished, putting pressure on the audit firms to reduce their fees.

  We also strongly believe that the fees charged for audit work must be at an appropriate level to properly reflect the work involved in carrying it out. Pressure to reduce fees may have the unwanted consequence of compromising the quality of an audit. We believe that quality must remain the fundamental driver of audit work. It would not be in the interests of audit quality or the public interest if firms were motivated to drive down their fees to a level which was not commensurate with the cost to them of carrying out the audit. We believe that company audit committees and shareholders must bear this in mind when considering the cost of the audit.

  In saying this, however, we reaffirm our belief that the audit must seek to deliver value to shareholders, and that the profession should be prepared to articulate the value which is derived from audit services.

4.   Does a narrow field of competition affect objectivity of advice provided?

  It is possible that the relationship between auditors and companies can become too close and that this can impact objectivity. Enron is a case in point. Enron had a 12-year relationship with its auditor, Arthur Andersen. As Andersen did not want to jeopardise lucrative consulting as well as auditing fees, it was reluctant to call Enron to account over the use of misleading financial reporting and the creation of special entities to hide debt.

  However, ACCA would not agree that the simple fact of there being only four major firms in the market is likely in itself to lead to threats to objectivity on the part of those firms' audit work. Professional standards contain strong strictures on this point and consideration of a firm's compliance with them is a key point of focus for regulators. The exposure of an audit firm to potentially ruinous damages claims for negligent work is also a strong motivating factor in encouraging audit firms to perform their work in accordance with applicable technical and ethical standards.

  It is worth noting however, that the incentive for firms to offer a high standard of audit service, driven by public interest/ethical considerations, is that their reputation and business could collapse very swiftly (as it did with Arthur Andersen) if there was an allegation of deliberate collusion/falsifying or covering up the audit trail.

5.   Alternatively, does limited competition make it easier for auditors to provide unwelcome advice to clients who have relatively few choices as there is less scope to take their business elsewhere?

  Even with a pool of only four big audit firms to choose from, companies can and do change their auditors if they are dissatisfied with the quality of service they are receiving. As regards "unwelcome" advice, the advice that an audit or professional services firm can be expected to give on business options should be the best advice the firm can give and should not be influenced by a calculation that the client has no choice but to accept it. As stated above, the consequences for a firm of auditors giving advice which is not in the client's best interests are such that firms have every incentive to give the best advice they can.

  In ACCA's view, the buyers of professional services are sophisticated and frequently have a professional background themselves. They are in a prime position to understand the needs of their organisations and to commission services which best support their strategies and objectives. Starting from the user perspective, therefore, it should be considered to what extent buyers might prefer to achieve economies of scale and benefit from the enhanced business knowledge their incumbent auditors have of their companies, leading to the potential for superior solutions. This is particularly true at the smaller end of the market.

  To be clear, therefore, ACCA supports the benefits to be brought to business of wider market choice. But we also recognise that buyers and users of auditing and related services may prefer to use one supplier to bring particular benefits to their business, subject to proper considerations relating to independence and integrity.

6.   What is the role of auditors and should it be changed?

  This is a key question because there remains an "expectation gap" between what the auditor is actually required to do and what many lay people, including shareholders and observers, think the auditor should do. Many believe, for example, that the role of an auditor is to search for and detect all evidence of fraud and error contained in financial statements. There is also a lack of in-depth understanding among business owners, investors, managers, regulators and auditors themselves about the current role of audit and what it should be in the future.However, as famously stated in Re Kingston Cotton Mills in 1896, by LJ Lopes of the Appeal Court: the auditor is "a watchdog but not a bloodhound".

  Auditing is primarily focused on examining past events. The auditor's role is to give an expert and independent opinion on whether companies' financial statements give a true and fair view of their financial position at the balance sheet date and of their previous 12 months' performance. The auditor has professional responsibilities under audit standards to look into the entity's internal control systems and governance structures to the extent that they have a bearing on the integrity of the financial statements, and on the same basis must consider whether fraud or error has or might have affected the accounts. The auditor performs this function in order to report to shareholders on how the directors have performed their stewardship role.

  While the auditor's report is essentially retrospective in character, it should be noted that the financial statements themselves include assumptions about existing trends which are then often projected uncritically into the future. Examples of this include assessments of the outcomes of long-term contracts and work in progress; assessments of the useful economic life of key assets; provisions and contingencies; and assumptions about future trends in the macro economic environment. The financial statements are also required to be prepared on the assumption that the reporting entity will remain a going concern, and the auditor makes his own assessment of whether or not this is likely to be the case.

  This issue of going concern often arises when companies collapse within a relatively short time of a clean audit report being written. The problem with going concern, from the auditor's perspective, is that organisations do not neatly stop being going concerns in line with balance sheet dates or the dates accounts are signed. On the contrary, they can and do get into serious trouble very rapidly. It is important to remember that the going concern assessment and the auditor's report are conducted at specific points in time, and cannot constitute a cast iron guarantee that the organisation will exist for the foreseeable future.

  ACCA believes audit has a key role to play as a source of public confidence in the financial reporting supply chain. Audit instills discipline, financial rigour, better corporate governance and can deter fraud. It is part of the operating fabric of the economy, and the success of capital markets is dependant on there being a competitive and stable audit market. A strong audit function promotes trust and contributes to the working of efficient markets.

  We do not believe the audit model is "broken" but believe that the audit needs to evolve so as to retain its value for shareholders, clients and other stakeholders alike. This should be achieved by extending the scope of the audit from simply giving an opinion on financial statements to addressing issues such as risk management, the effectiveness of corporate governance, and testing the assumptions underlying an organisation's business model and its likely sustainability. External auditors should also engage more effectively with the internal audit function, which may bring issues of going concern to light more quickly. And as the audit role evolves, we need to look not just at cash flow and going concern but at how auditors can engage more with companies' forward planning activities.

  It is true that sophisticated and complex business models in the largest global companies create challenges for auditors, and there is a consequential liability issue which must be addressed, but firms should see extension of the audit as an opportunity to enhance its value, rather than as a threat.

  We also believe that the profession needs to embrace technological developments and reporting languages as a way of delivering the audit efficiently at both the large and smaller ends of the market, and to promote approaches that enable cost-effective delivery.

  In the light of current and future developments in financial and non-financial reporting, therefore, ACCA is supportive of an evolution of the overall function of the external auditor, though it is reasonable to expect that such an evolution would need to be accompanied or preceded by an acceptable, fair and proportionate evolution of the applicable law on liability as stated above. ACCA believes that some form of liability reform needs urgently to be considered in the light of the very limited success of the reforms introduced by the Companies Act 2006.

7.   Were auditors sufficiently sceptical when auditing banks in the run-up to the financial crisis of 2008? If not, was the lack of competition in auditing a contributory factor?

  Professional scepticism is a fundamental concept in audit, as demonstrated by the prominence given to it in auditing standards. It is also enshrined in the ACCA Rulebook, which sets out fundamental principles such as objectivity, integrity, and professional competence and due care. In the ACCA Rulebook, independence is described as: "The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, allowing an individual to act with integrity and exercise objectivity and professional scepticism".

  It is therefore a matter of great concern that the joint FSA/FRC discussion paper published in June 2010[2] raised concerns about this, stating that auditors showed a "worrying lack of scepticism" in some of their audits of financial institutions, and that they had focused too much on gathering and accepting evidence to support the assertions of institutions. These concerns are reiterated in the audit inspection reports on the Big Four firms published by the Professional Oversight Board in September 2010, which concluded that there was a lack of "sufficient professional scepticism in relation to key audit judgements".

  While ACCA has no evidence itself that professional scepticism has not been applied appropriately in the audit of banks, we believe that audit firms and the audit profession need to take the conclusions of the above report very seriously and to consider remedial steps as a matter of urgency.

8.   What, if anything, could auditors have done to mitigate the banking crisis? How can auditors contribute to better supervision of banks?

  A key point arising from this question is to ask whether the current role of auditors reporting on the company's financial statements is still sufficient to meet stakeholders' needs. Put simply, are auditors are being directed by audit standards to look at the right things?

  ACCA agrees that, in the light of the crisis, opportunities should be explored to add value to the role of the auditor. One option that we believe is especially worthy of consideration concerns the potential contribution that the auditor could make to the assessment of the risks inherent in the client company's business model.

  A company's business review requires, amongst other things, a board to set out significant risks to the viability of their company's business model. Northern Rock's business model, for example, depended on being able to finance operations through access to wholesale money markets, and its stock rating assumed continuing growth of borrowing and lending. Without this access to markets the company could not have expanded and once this market closed it ceased to be viable. Ultimately, the bank's business model was unsustainable and based on erroneous assumptions about the future of the economy.

  ACCA believes therefore that auditors should be encouraged to engage more fully with the business model, which should be made accessible to them, allowing them to test its assumptions. To this end, we welcome the announcement by the Coalition Government in May 2010 that it will reintroduce the Operating and Financial Review (OFR). The aim of the OFR is to give a comprehensive and forward looking account of the business to shareholders "through the eyes of management or the board". The process of drawing up such a review should be as informative to the board, particularly the non-executive directors, as it should be to shareholders.

  The question then becomes whether the corporate reporting system as a whole needs an overhaul. As currently constituted, the audit is, to a degree, only as useful as the financial statements on which it reports. Many would argue therefore, that a move to embrace substantially more forward-looking, qualitative and non-financial data would improve its relevance. The role of audit and the nature of audit methodology would have to change accordingly.

  Corporate governance is another area in which more expansive reporting would be useful. ACCA has also long argued that greater emphasis should be placed on principles in corporate governance (as opposed to specific compliance obligations), and it is encouraging to see that the FRC's Corporate Governance Code is moving in this direction. Broadening the scope of audit/assurance and ensuring good governance, control and risk management (as set out in a series of reports produced by ACCA) could help reduce the risk of business failure. Prevention could also assist in ensuring the right conditions for a broader market.

  ACCA would also like to see companies to provide more information in their annual reports about their business values and how they monitor that these values and standards are in place, because this goes to the heart of the board's role and to the heart of governance. ACCA would like shareholders to insist that such information is provided and use it as a basis for engagement with the board. Few companies currently address ethics or values in their annual reports. Were they to do so, these should provide an insight into how boards set the company's values and standards and how they ensure that these are reflected throughout the company.

  Another potential innovation concerns management letters. At a roundtable event held by ACCA in Singapore with leading auditors, regulators, companies and investors, the point was also made that comments from auditors in the management letter should be reflected in the annual report. This, it was believed, would extend the welcome and increasing communication between auditors and non-executive directors on the audit committees to a wider audience of shareholders, and give investors more timely information that they require. It would be essential here, of course, that auditors did not then tone down the management letters.

  One answer might be an extension of the current role of audit, at the larger end of the market, with formal inclusion of risk and internal controls.

9.   Do conflicts of interest arise between audit and consultancy roles? If so, how should they be avoided or mitigated?

  The potential for conflicts of interest to exist has been acknowledged by the investor community, accounting and audit firms, professional bodies and regulators.

  Some have advocated that in order for an auditor to remain strictly independent they should not be allowed by law to provide audit clients with any other advisory services.

  The consensus so far, though, is that conflicts of interests can be managed through self-regulation and do not need to be regulated by statute. It should be noted that there have already been significant changes to the UK regulatory regime for non-audit services since the collapse of Enron. Requirements relating to auditor independence and the responsibilities of the various parties are now clearer, and there is greater transparency, for example:

    — The UK Code on Corporate Governance now provides that the audit committee must play a key role in any decision to purchase non-audit services from the same firm as is carrying out the audit.

    — The APB Ethical Standard 5 (ES 5) sets out detailed caveats for the provision of specific non-audit services, which amount to a de facto prohibition in many cases, particularly for listed entities. ES 5 has considerably strengthened auditor independence already and resulted in fewer non-audit services being provided. Figures quoted in Financial Director magazine, for example, showed a dramatic decline, since Enron, of the ratio of non-audit to audit fees in listed company accounts. From a peak of 191% in 2002, the figure steadily reduced to 71% in 2008. So it may be the case that extra regulations and new ethical standards issued by the audit profession since 2002, combined with market forces, have provided an answer to the "problem".

  ACCA does not believe though that the profession is complacent on this issue. The regulation of conflicts of interest is a key concern of the FRC, and in 2009 it initiated another review of whether the current rules on the provision of additional non-audit services are sufficient. As an interim measure the FRC wrote directly to major firms to suggest that they be "cautious" before entering into arrangements "which stretch the internal/external audit boundary", not least because it could prove to be inconvenient and/or costly to change such arrangements should the outcome of the FRC's work be that the Ethical Standards are changed in a way that affects the provision of such services.

  While much attention in this debate focuses on listed companies, we should not forget the needs of SMEs, which can find it costly to use a separate supplier for the provision of non-audit services. Involvement in non-audit services can lead to better auditing of SMEs and should not be discouraged.

  ACCA does not believe a complete separation of audit and non-audit services is either possible or desirable. Some services are closely related to audit while the extra insight of the incumbent audit firm brings quality and efficiency benefits that companies would not wish to lose. Both auditors and their clients have argued that the knowledge acquired during the audit process can allow other services to be provided less expensively.

  Nor is there any visible demand in the investment community for such a split, and we have we seen no evidence that the current framework, with its independence safeguards and new ethical standards, is failing in practice. We believe that quality of services offered to businesses could suffer if artificially divided in this way.

10.   Should more competition be introduced into auditing? If so, how?

  ACCA agrees with the 2009 OECD report[3] that smaller audit firms are prevented from competing with the Big Four firms due to restrictions set by large public companies and are thus unable to enter or expand further into the audit market for quoted and larger companies.

  While we do not suggest that concerns about liability are the biggest impediment to the involvement of mid-tier firms, the liability issue, and the related concern about the possibility of acquiring adequate insurance cover, are nevertheless important factors in their calculation of whether they could cope with listed company clients. The UK Government moved in 2006 to introduce contractual limitation of liability agreements, and while these appear to be working in some sectors, they are very difficult to adopt in the listed company sphere, not solely because of the problem of getting shareholders to agree to them but because of the adverse position of the US market authorities, which see agreements of this type as being direct threats to audit quality.

  It is noteworthy that countries which have legislated for some form of statutory restriction of liability have succeeded in increasing the pool of audit firms operating in the listed sector. Germany is probably the best example. It has had a statutory limit on auditors' liability since 1931: the current cap for the audit of listed companies is 4 million euros. While the top 20 companies are all audited by Big Four firms, there is significantly higher involvement of mid-tier firms among smaller listed companies—in all, 34% of all listed companies there are audited by firms outside the top 8 firms.

  ACCA does not suggest that the imposition of a fixed monetary cap is the best solution to the problem of market concentration. But we believe that some reform of the current system, which leaves auditors of major companies exposed to very substantial claims for damages in some cases, must be seen as a necessary component of the response.

  Furthermore, it would not in our view be appropriate to intervene directly in the market by, for example, forcing the firms to downsize or break up. We believe that the better solution would be to address the barriers to competition which currently exist and which act as a deterrence to the involvement of firms outside the Big Four.

11.   Should the role of internal auditors be enhanced and how should they interact with external auditors?

  Internal and external auditors have mutual interests regarding the effectiveness of internal financial controls. Both professions adhere to codes of ethics and professional standards set by their respective professional associations. There are, however, major differences with regard to their relationships to the organisation and to their scope of work and objectives. The two functions have distinct roles:

    — External Audit exists to provide assurance to the shareholders/ stakeholders that the annual accounts are free from material error. External auditors review and report on a number of matters, including the company's financial statements, its reporting processes and the sufficiency of its internal controls.

    — Internal Audit exists to provide the board/management assurance that the internal controls to manage risks that threaten the organisation's objectives are in place and working as intended. Internal audit can provide the audit committee and management with an assessment of the internal controls in place with respect to the mitigation of risk, as well as the efficiency and effectiveness of the operations of the company.

  The financial crisis and the increased focus on corporate governance have caused Internal Audit departments to consider their role and focus and how these should evolve. ACCA's view is that the role of internal auditors is likely to grow in importance as companies seek to manage risk better. We further believe that:

    — The internal and external auditors should meet periodically to discuss common interests; benefit from their complementary skills, areas of expertise, and perspectives; gain understanding of each other's scope of work and methods; discuss audit coverage and scheduling to minimize redundancies; provide access to reports, programs and working papers; and jointly assess areas of risk.

    — In fulfilling its oversight responsibilities for assurance, the board should require coordination of internal and external audit work to increase economy, efficiency, and effectiveness of the overall audit process.

    — External auditors are party to a wealth of corporate information. They are currently required to pass on information to regulators where they consider that that information is relevant to the regulator's functions. There is, potentially, scope for arrangements to be explored whereby auditors can, with due respect for their professional responsibilities, liaise further with regulators to ensure that relevant information is made available.

12.   Should the role of audit committees be enhanced?

  Yes. It is often stated that audit committee members have a part-time job with full-time responsibilities. The audit committee is critical to ensuring the organisation has strong and effective processes relating to independence, internal control, risk management, compliance, ethics, and financial disclosures.

  Given the scale of the financial crisis, it is clear that many companies failed properly to assess and manage their risk. It is therefore clear that the oversight role of the audit committee will continue to expand and to grow in importance. Audit committees need to be independent and must review management decisions with healthy scepticism. This process necessarily includes a close analysis of the way companies assess and manage risk.

  To fulfil its responsibilities, an audit committee should use all available tools, including the company's internal audit function, external auditors, and, if necessary, the retention of outside counsel and advisors. Each of these tools serves a key function.

  If and when the scope of the audit and/or the reporting framework is expanded, ACCA would expect the role of the audit committee too to change, especially if new areas of reporting are introduced. At this stage, however, we consider it more appropriate to take steps to encourage audit committees to fulfil their potential in the governance and reporting processes that currently exist. This means ensuring that knowledgeable and independent-minded individuals are appointed to audit committees and that they develop an aptitude for asking the right questions, both to their external auditor and their internal accounting staff. The FRC has published written guidance in this area and ACCA would like to see all listed companies implement this guidance in full.

13.   Is the auditing profession well placed to promote improvement in corporate governance?

  Yes. Auditors already play a part, albeit a limited one, in the monitoring of clients' corporate governance arrangements. Under the UK Listing Rules, auditors are required to review specified parts of the company's compliance statement (with the UK Corporate Governance Code) that are considered to be relevant to the financial statements. Under the UK Listing Rules, companies are now required to disclose prescribed information regarding their corporate governance arrangements, which must include details of their internal control and risk management systems as they relate to the financial reporting process. This information may be disclosed as part of the statutory directors report or in a free-standing statement. Either way, the company's auditor is required by law to state in his audit report whether, in his /her opinion, that information is consistent with the financial statements. Where the information is not disclosed at all, the auditor must draw attention to that fact in his /her report.

  Thus, while the auditor's involvement in this area is currently limited, it is already recognised that the way that a company arranges its corporate governance systems has implications for the integrity of its financial reporting, and therefore for the role of the auditor. Given that the auditor has a professional and legal responsibility to understand a client company's internal structures, and how they contribute to the integrity of its financial reporting processes, ACCA would agree that the auditor is well placed to assume a greater role in this area.

  ACCA has done much work in the area of governance. In particular our policy paper Climbing Out of the Credit Crunch[4], examines five key areas: corporate governance, remuneration and incentives, risk identification and management, accounting and financial reporting and regulation—and recommends that accepted practices in all these areas need to change to avoid future failures.

  ACCA was in fact one of the first organisations to point out that the 2007 banking crisis was to a great extent a corporate governance failure, and to assert that there is scope for audit to evolve and to enhance business confidence. These conclusions have now been widely accepted. All the banks that failed had complied with the letter of corporate governance requirements. But what they did not do, in many cases, was to show a genuine commitment to the spirit of good governance. We believe that a greater commitment to behavioural issues, and to values and the principles of good governance, are needed if sustained improvements in governance are to be achieved. Merely expanding compliance requirements and tightening external regulation is not likely to be the long-term answer.

October 2010

1   A restriction which prevents a company from using a firm other than one of the "Big Four" to provide audit and other services. Back

2 Back

3   Competition and Regulation in Auditing and Related Professions, Back

4 Back

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