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
"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: http://www.accaglobal.com/af/audit#top
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
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
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
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
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 firmsit 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
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
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
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
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
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
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
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
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
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
It is therefore a matter of great concern that
the joint FSA/FRC discussion paper published in June 2010
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
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
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
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,
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
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 companiesin
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
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
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,
examines five key areas: corporate governance, remuneration and
incentives, risk identification and management, accounting and
financial reporting and regulationand 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.
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
Competition and Regulation in Auditing and Related Professions,