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March 29, 2011

House of Lords report – industry reaction

Recommendations published by the House
of Lords into UK audit market have provoked both positive and
negative reaction. The International Accounting
Bulletin
documents reactions from across the
industry.

IAB spoke to PwC head of UK Public
Policy Pauline Wallace, Grant Thornton UK partnership oversight
board chair Steve Maslin, BDO audit partner James Roberts and ACCA
chief executive Helen Brand to gather their thoughts.

The industry has responded
fairly positively to the majority of the reports findings and
recommendations. 

Pauline
Wallace
said: “There’s actually quite a lot I think is
good in here, especially the stuff around audit committees which
supports work by the FRC and indeed the progressive agenda which
we’ve been pushing for a long time with our clients”, she said.

Steve
Maslin
said: “The Committee has delivered a focused report
and I welcome its comments on better dialogue between bank auditors
and the Bank of England, and recommendations for audit committees
to report on difficult financial reporting issues.

“These are the two key work
streams the large firms have been working on with the Bank and the
FRC in learning lessons from the crisis and I am pleased to see the
Committee endorsing the profession’s efforts in this regard.”

James
Roberts
said: “We think it’s a very good report. They
have identified no silver bullet on this competition piece and
that’s why they’ve suggested referral to OFT and competition
commission and I’m not sure they could have done anything else
actually.

“I liked all of it.
Regarding the material on competition they’ve identified all the
issues that can be fixed straight away. The recommendations will go
some way towards making a more even playing field, certainly more
than the bumpy one we have at the moment.”

Helen Brand
also welcomed the report:  “We welcome the report and agree
with many of its observations and recommendations. We are
particularly pleased that on several occasions, ACCA’s own
recommendations and evidence have been taken on board and
specifically referenced by the report.”

“It is very pleasing to see
that the Lords have recommended that the audit should expand in
scope to provide broader, more up-to-date assurance on matters such
as risk management, the business model, and the business review.
ACCA also believes reform would do much to reduce the ‘expectations
gap’ and meet stakeholders’ needs,” she adds.

The OFT
Investigation

The report has recommended
an investigation by the UK Office of Fair Trading (OFT) to examine
restrictions of competition, conduct a market study of restrictive
bank covenants and several other issues such as additional auditor
assurance to investors. While most firms are not against an
investigation, there is a sense that the next investigation should
tackle specific issues head on.

Pauline
Wallace
says she is “disappointed” that the Lords report
has decided to recommend an investigation by the OFT [Office of
Fair Trading] into the audit market because she said the market is
already very competitive.

“I certainly hope that if
there is an OFT inquiry it focuses very heavily on something it
could do something about which is the issue of these loan clauses
that we’re expected to audit. Otherwise I hope that we’ve now put
behind us investigations into all of the auditors in the financial
crisis because we’ve had quite a lot of them,” she said. 

Steve
Maslin
is also sceptical about what the investigation will
entail.

“While I welcome
recommendations for a detailed investigation by the OFT, I am
concerned about the OFT’s current perception. Some of the evidence
it provided to the Committee suggested that concentration was
caused by investor needs for audit quality and capability to
undertake complex audits across the World.”

“The OFT enquiry must, at
the very least, lead to the banning of “Big 4 only” clauses in bank
agreements, which nearly all commentators, including the 4 larger
firms, say are wrong. If not, it will show the UK regulatory
framework in a poor light, with lots of regulators conducting lots
of toothless reviews,” Maslin said.

Market
Concentration

Pauline
Wallace
said: “We continue to believe that this is a
fiercely competitive market. All of my audit partners will also
tell you they fight for every audit they claim when they go out to
tender. They will also tell you it doesn’t require an audit to go
out to tender for them to put pressure on auditors to ensure price
is kept to a sensible level. I think it is unfortunate they have
failed to see that”.

Steve
Maslin:
“In urging regular retendering in the FTSE 350,
the Lords have recognised that measures to create a more vibrant
audit market should be focused at the upper end of the listed
market where concentration is a real problem.”

IFRS

Audit Partner at BDO James
Roberts
agrees with the findings of the report that IFRS
might be limiting auditors’ scope to exercise prudent
judgement.

“The underlying thing is that the IFRS
framework has different weighting from one to another. In terms of
reliability and prudence IFRS has gone to the slightly wrong side
in a bid to get greater relevance. Our view is accounting has
become overly complex in financial reporting sense.”

While the ACCA welcomed most of the report
findings Chief executive Helen Brand warned that
the Lords’ criticisms of IFRS and its effect on audit quality are
“misguided and could have potentially serious implications
internationally”.

According to Helen Brand
the recommendations from the Lords report need further
clarification:

 “It is important to note that the
specific IFRS weakness identified by the Lords – around expected
rather than incurred loan losses – is already being remedied. The
recommendation that UK GAAP should be continued ignores the fact
that the key accounting standards in UK GAAP – on financial
instruments – are virtually identical to existing IFRS.

“Any shortcomings of the accounts and audits
of banks should not be either a reason to deny global
standards to other companies or a justification of continuing to
impose on other UK businesses the extra costs of maintaining both
systems.”

Head of ICAEW Financial Reporting Faculty
Nigel Sleigh-Johnson said:

“IFRSs  – a very young set of standards –
were of course
tested extensively by
the financial crisis, and they coped pretty well with the very exceptional
stresses. Some improvements
were, not surprisingly, necessary, and the IASB is for example
well on its way to introducing improved requirements for bank loan
provisioning. It’s taken time, but it’s complex stuff.

“The
report focuses of course on audit not financial reporting, and
I don’t really think it provides sufficient evidence
for 
the assertions that IFRS is ‘an inferior system’
and that there should be no
extension of mandatory IFRS reporting
here
.  On the
latter point we should await the outcome of the ASB’s
detailed 
examination of the case for aligning UK
requirements with IFRS, already
well underway
.”

Public Sector Audit

Grant Thornton said it welcomes efforts to
make enable non Big-Four firms to win public sector work.
Peter Maslin said: “We welcome the Committee’s
proposals for the Government to use its procurement power, upon
abolition of the Audit Commission, to create stronger firms better
resourced to compete with the four largest firms.

“The public sector audit market has some
excellent features, in particular demonstrably high quality, good
value for money and absence of concentration among the four largest
firms. The FTSE audit market should learn from that.

James Roberts of BDO agrees
that the public sector should consider the mid tier more often:
“Government work is a very small part of our revenue. It was
something we suggested in our evidence to the committee.”

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