Years ago, as a newly qualified CIMA accountant, I heard Allan Cook – then technical director of the Accounting Standards Board – lecture on approaches to financial reporting. What he said remains with me to this day: "the accountancy profession has a choice." It could follow the spirit of an "ethical framework"; or it could move to a detailed, rulebased "cookbook" setting out in minute detail what organisations could and could not do.
I was reminded of Cook's choice in October when I heard about proposals from the Auditing Practices Board (APB) for new ethical standards. They cover integrity, objectivity and independence; financial, business and personal relationships; long associations with the audit engagement; fees and remuneration; and non audit services provided to audit clients.
But: it's not black and white. Jon Grant, executive director of the APB, said: "The standards permit auditors to provide non audit services, such as tax and accountancy, provided any threats to auditor's independence that arise can be mitigated through the use of safeguards." (We're not sure what "safeguards" means but anyway...)
The standards have caused consternation in the auditing profession. But this was no sudden outbreak of panic. The APB put out draft regulations for consultation earlier last year. Auditors took those initial proposals to mean they could either be auditors to a company or they could offer consultancy services (tax, financial advice and so on). Many firms knew what they would go for. Audit is often a loss-leader. The battle lines were well drawn by the time of the final announcement in October.
If the APB does not back down and the accountancy firms, however unwillingly, adopt the ethical standards, existing auditors may be telling medium-sized and growing businesses to look for a new firm to tick-and-bash the books this year.
The professional bodies are kicking against the standards because they believe they add (unintended) burdens on clients and that the APB has ignored economic reality for businesses with turnover between £5.6m and £22.8m. The ICAEW is so enraged that its Council has refused to agree to the rules itself. It passed them to a sub-committee to actually give them the nod.
The profession's reading of the new rules has led them to believe that firms will be stopped from providing audit services to a number of existing clients and that rules on the provision on non-audit services will even restrict their ability to represent them before the Inland Revenue, for example. The result? SMEs will be forced to employ two different firms.
The APB has issued an exposure draft (ED) on exemptions available for small companies. "Small", as they define it, is actually below the audit threshold. So the exemption is pointless. The profession wants it to be turned into "exception", where the rules only apply to quoted companies. This lobbying has so far produced one tiny concession: the APB has decided that in certain circumstances auditors can offer services to "informed" management rather than "knowledgeable" management. This change of word means that it is the auditors who can do the informing.
The proposals are portrayed by firms as a dagger strike at the heart of the relationship between audit firms and their smaller clients. However, not all in the accountancy profession agree. Take Louis Cooper, director at tax advisory firm Chiltern plc.
It doesn't do audit, so it would benefit from a forced "ethical" separation of powers. Cooper says resistance to the move is partly down to limited transparency on true costs. He rejects the argument that bringing in another firm of advisers automatically increases costs. Even where the audit firm is used, it's unlikely to be the same individuals doing both audit and advisory. There are still costs to briefing staff on the issues, still more billable hours.
Also, how do we know we're getting the best advice on sorting out that corporate finance problem just because the firm advising happens to be our auditor? As an independent consultant, I'm amazed when I start to advise companies at how their qualified, experienced auditors often fail to implement blindingly obvious quick fixes in other areas.
So perhaps the best possible outcome of this row is that it alerts us to the idea that there's advice available from other sources. Perhaps we should think of it as good corporate governance, strong risk management.
Maybe that's naïve. The reality is that most FDs don't have the time
or money to seek out fresh advice on small issues. So you and your auditors
look set to pay the price for the misdeeds of others. After Enron et al, we're
all enduring tighter regulation, regardless of whether there really are endemic
problems with audit/advisory. Tight, that is, to the point of choking.