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

Further supplementary memorandum by Mr Veron Soare, Executive Director, Professional Standards, ICAEW (ADT 9)

  I would like to comment on a number of the points that were made during the Committee hearing on Tuesday 9 November at which representatives of the supervisory community, including the Financial Reporting Council (FRC), gave evidence. As a Recognised Supervisory Body (RSB) for statutory audit under the Companies Act 2006, the ICAEW has a useful perspective to offer on the matters raised.


  As the Committee may be aware the current arrangements for audit supervision in the UK arose out of a 2002-03 Government Review commissioned by the then Secretary of State for Trade and Industry (Review of the Regulatory Regime of the Accountancy Profession). This Review concluded that the arrangements established under the Companies Act 1989 were fundamentally sound but that the system could be strengthened.

  This led to the introduction of a revised supervisory framework (now part of the Companies Act 2006) whereby Recognised Supervisory Bodies (RSBs) such as ICAEW are subject to the oversight of the Professional Oversight Board (POB) and are also required to participate in independent arrangements for the monitoring of public interest audits and the investigation, for disciplinary purposes, of public interest cases. The latter arrangements are operated with ICAEW's agreement via the Accountancy and Actuarial Discipline Board (AADB), the former via the Audit Inspection Unit (AIU), who along with POB are part of the FRC.

  It should be noted that auditing standards, effectively the "rules" on how to conduct an audit, sit under the control of the Auditing Practices Board, also part of the FRC.

  These arrangements are now mirrored to a very large extent in the EU's Statutory Audit Directive. While in many respects the UK has led the way in the development of robust arrangements for the supervision of auditors, for good reason the EU Directive draws a clear distinction between those responsible for the day-to-day regulation of audit firms and those who provide oversight of this process. In our view placing regulatory functions within the remit of the FRC blurs the separation between regulation and oversight. It is with this in mind that we write to the Committee.


  In their evidence session on 9 November the FRC noted that, as they do not register/licence the audit firms which the AIU inspects, they only have the "nuclear" option of recommending to a RSB the removal of a firm's registration/licence. This is because under the terms of the Companies Act the AIU provides independent inspection which the RSBs then act upon. Under the Act, RSBs have a wide range of powers to take action against firms including removal of registration. All RSBs can fine a firm, place restrictions on the type of audit clients it can have, place conditions on how audit work is conducted and remove the right of individuals within the firm from being involved in audit.

  With respect to reports made by the AIU to the Audit Registration Committee (ARC) of the ICAEW, these are closely reviewed and appropriate sanctions applied in accordance with the circumstances of each case. The AIU has never recommended that a firm's registration be removed, or that an individual be prevented from undertaking audit work although it has made other recommendations for regulatory action. In all cases these have been taken up by the ARC and action taken against the firm or individual in question. In some cases the ARC has taken additional action to that requested by the AIU, such as restricting a firm from taking on new audit appointments, until the underlying matters have been dealt with—this may also require the firm to submit to an additional AIU inspection.

  In passing it is worth noting that despite the most recent round of AIU reports on large firm audits raising issues requiring "significant improvement" and an increase in auditor scepticism, no request was made by the AIU to the ICAEW's ARC to take any regulatory action against either a large firm or any individual auditor.

  As we have stressed to the Committee in our previous submissions, it is important that recommendations on the future of audit regulation are evidence based. The AIU and POB are made aware of the ARC's decisions that are based on AIU reports and they have never commented adversely on the decisions or the process used to reach them.

  As far as the ICAEW is concerned, nothing presented by the FRC to date suggests that the Companies Act 2006 provisions are not working effectively. However, we recognise that the continuing success of the regime depends on clear lines of reporting between the AIU and the ARC.

  With reference to the AADB, it is able to use any disciplinary sanction open to the ICAEW, including the power to impose unlimited fines and exclude from membership. This arrangement continues the powers enjoyed by the AADB's predecessor body, the Joint Disciplinary Scheme (JDS). Like the JDS, the AADB independently investigates public interest cases against audit firms registered with the ICAEW and is designed to play a key role in maintaining confidence in the UK audit profession. However, despite accumulating a substantial caseload the AADB shows no evidence of an ability to meet the promises concerning speed and thoroughness of investigation made at its outset. Indeed, according to its website, since announcing its first investigation in 2005, the AADB has brought only two cases to a tribunal hearing. An independent review of the effectiveness of its work may now be timely.

  During their evidence session the FRC also commented that it needed a wider range of sanctions against RSBs. Again we would advocate an evidence based approach here. The POB undertakes annual reviews of each RSB. Inevitably matters are discussed and recommendations made. As far as we are aware, all matters raised have been resolved to the satisfaction of the POB as evidenced by successive annual reports by the POB to the Secretary of State.

  As the Committee is aware the European Commission is currently consulting on a number of these issues at a pan-European level including the possibility of an EU-wide audit licence, which would have a major impact on current licensing arrangements for audit firms carrying out audits of public interest entities. This has been a global crisis and reform proposals must be capable of implementation across international markets.

  I would be happy to brief you further on any or all of these matters.

23 November 2010

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