Nội dung

Accountancy futures Audit under fire: a review of the post-financial crisis inquiries About ACCA 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. Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and accountability. We believe that accountants bring value to economies in all stages of development. We aim to develop capacity in the profession and encourage the adoption of consistent global standards. Our values are aligned to the needs of employers in all sectors and we ensure that, through our qualifications, we prepare accountants for business. We work to open up the profession to people of all backgrounds and remove artificial barriers to entry, ensuring that our qualifications and their delivery meet the diverse needs of trainee professionals and their employers. Throughout 2010 and 2011 the role of audit has been the subject of a number of high-level inquiries in several jurisdictions. This paper outlines ACCA’s position on the key issues that have been raised in those inquiries. We support our 147,000 members and 424,000 students in 170 countries, helping them to develop successful careers in accounting and business, and equipping them with the skills required by employers. We work through a network of 83 offices and centres and more than 8,500 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote the appropriate regulation of accounting. We also conduct relevant research to ensure that the reputation and influence of the accountancy profession continues to grow, proving its public value in society. About Accountancy Futures The economic, political and environmental climate has exposed shortcomings in the way public policy and regulation have developed in areas such as financial regulation, financial reporting, corporate transparency, climate change and assurance provision. In response to the challenges presented to the accountancy profession by this new business environment, ACCA’s Accountancy Futures programme has four areas of focus – access to finance, audit and society, carbon accounting, and narrative reporting. Through research, comment and events ACCA will contribute to the forward agenda of the international profession, business and society at large. www.accaglobal.com/af © The Association of Chartered Certified Accountants, May 20 2011 Contact for further Information Ian Welch, Head of Policy, ACCA tel: + 44 (0)20 7059 5729 email: ian.welch@accaglobal.com Executive summary Audit has never had such a high political profile. In the UK, Brussels and the US the global financial crisis has sparked a series of high-level inquiries into the role and effectiveness of audit, while in Singapore, among others, regulators are actively engaging with stakeholders to assess how audit can be enhanced. The European Commission’s wide-ranging Green Paper on audit will be debated in Brussels throughout 2011 and will eventually lead to legislation covering the European auditing profession. Michel Barnier, the EC’s Financial Services Commissioner, has already warned, at a high-level summit in Brussels in February, that ‘the status quo is not an option’. In the UK, the House of Lords Economic Affairs Committee has conducted a highly critical inquiry into audit competition, which has led to a referral to the Office of Fair Trading on the basis that the complexity of the issues covered requires that they be fully examined by a betterresourced body than a Parliamentary committee . Meanwhile, in the US, the Public Company Accounting Oversight Board has been examining the need for changes to the current auditor reporting model and has consulted a variety of stakeholders. The US senate has also undertaken a hearing, in which regulators and standard-setters have been called to give evidence, into the role of the accountancy profession in preventing another financial crisis. ACCA firmly believes in the value that audit brings to business and the wider economy by building trust in corporate reporting. In our 2010 papers Restating the Value of Audit1 and its follow up, Reshaping the Audit for the New Global Economy, 2 which was based on the findings from an international series of round tables held by ACCA in 2010, we have made the case for the role of audit to be extended to meet stakeholder needs more effectively. Nonetheless, we accept that policymakers and regulators have every right to ask tough questions on the role of audit in the global financial crisis and that the profession needs to respond appropriately. Several of these issues, including audit competition, have been examined in inquiries in more than one jurisdiction and this paper sets out ACCA’s thinking on some of the central questions in the international debate. Audit concentration In order to increase audit competition, ACCA believes policymakers need to take action on restrictive covenants and particularly on auditors’ liability. The use of covenants is a directly anti-competitive measure, while easing the burden of potentially catastrophic litigation will encourage new entrants to enter the large audit market. Audit independence ACCA rejects calls for the banning of non-audit services and for mandatory rotation of firms. We believe that joint audits are ineffective but are the lesser of two evils, compared with rotation. Fuller disclosure by audit committees of the basis of their choice of auditor is recommended. ACCA backs an enhanced role for audit committees, though warns against over-reliance on them. Expanding the role of audit ACCA argues that audit should be enhanced to take on areas such as risk management, corporate governance and testing of the assumptions underlying companies’ business models. This would meet stakeholder needs more effectively, address criticisms of the narrowness of the audit role and so help to bridge the ‘expectations gap’. 1. Restating the Value of Audit, ACCA, 2010, http://www2.accaglobal.com/ pubs/general/activities/library/audit/audit_pubs/pol-pp-rva2.pdf 2. Reshaping the Audit for the New Global Economy, ACCA, 2010, http:// www2.accaglobal.com/pubs/general/activities/library/audit/audit_pubs/ pol-af-rtf2.pdf Audit under fire: a review of the post-financial crisis inquiries EXECUTIVE SUMMARY 1 Audit committees ACCA agrees that audit committees, acting independently from executive directors and management can do much to provide additional confidence in the integrity of the accounting and auditing processes. But we caution that recent inquiries may have invested too much reliance in audit committees – they are usually small groups with limited resource and not everyone on them are technical experts. Going concern ACCA would support reform of the current ‘all or nothing’ report to allow a more graded approach. Ways must be found to break the logjam whereby any modification to a clean audit report can trigger immediate loss of confidence in a company by investors or credit providers. Auditor/regulator dialogue Regulators should build relationships with auditors that promote collaboration rather than separate working. Mutual trust and understanding are important drivers of effective communication, which is key to the achievement of each party’s objectives Audit of small entities Ways of auditing small and medium-sized enterprises (SMEs) need to be revised to ensure direct relevance to those entities. An internationally agreed range of assurance services for businesses not subject to audit is needed. But policymakers should not conflate audit with ‘red tape’. Audit adds value to businesses’ financial statements and makes it more likely that they will raise finance effectively. International Financial Reporting Standards ACCA rejects claims that the IFRS regime has led to a lessening of prudence or judgement in audit. While prudence as an accounting concept is not central to IFRS, the system demands that companies present their position and performance fairly. Criticisms of the accounting standards on this issue have been misplaced and their perceived effect on audit mistaken. 2 1. Audit concentration The Big Four’s dominance of the audit market was the direct focus of the Lords’ inquiry and one of the key issues in the EC Green Paper. The ‘systemic risk’ posed by such an oligarchy and the fears of what would happen if four turned into three drove both inquiries to seek answers. Solutions are hard to find. The Financial Reporting Council (FRC), the UK City regulator, set up a Market Participants Group of investors, companies and audit firms in October 2006 and a year later published 15 recommendations intended to allow the audit market to work more efficiently and, in the medium to long term, to increase audit choice in the UK. The recommendations included supply-side measures intended to encourage non-Big Four firms to offer audit services to large public-interest entities, and demand-side measures to make boards more accountable to shareholders and reduce the perceived risks to directors who choose a non-Big Four auditor. Yet in its fifth annual Progress Report in June 2010, the FRC admitted that ‘to date there is limited evidence that the recommendations have had a significant impact on market concentration and the risks arising from that concentration’. In fact, the FRC admitted that concentration had actually increased. ACCA agrees that more competition in the market would be beneficial. As we saw in the banking sector, the existence of institutions that are ‘too big to fail’ can never be healthy. We agree with the Commission that measures are needed to overcome the barriers that prevent smaller firms from taking on large audits, which we outline below. But we do not agree with the idea originally floated of downsizing or restructuring those firms that the EC Green Paper referred to as posing a ‘systemic risk’ because of their size. We do not believe that regulatory action of this kind is appropriate, and nor indeed is artificial intervention into the market, such as putting ‘caps’ on the number of audits that any one firm can carry out. Companies have a right to appoint whomever they want and regulatory intervention of this kind, which tries to ‘buck the market’, cannot be supported. Audit under fire: a review of the post-financial crisis inquiries While we share the Lords’ frustration at shareholder apathy and lack of involvement in the companies they own (although this is being addressed, at least in UK, by the advent of the Shareholder Code, which increases their responsibilities), the only long-term answer must be persuading them that their best interests are served by a healthy competitive audit marketplace, rather than an oligarchy. Although the largest global companies will inevitably require the services of large global firms, directors and shareholders of other listed companies should consider whether other audit firms could service them as effectively. We believe action in two areas in particular could help to boost competition and remove barriers that deter or prevent non-Big Four firms from taking on large audits. (a) Restrictive covenants The first proposal is that restrictive covenants should be outlawed. In the UK, the government has asked the Office of Fair Trading to examine how widespread the problem is – a move that ACCA welcomes. The top six firms stated in a joint submission to the OECD in 2009 that: ‘in certain countries including the USA, UK, Germany, Spain and Finland we have encountered clauses or requirements in contractual agreements between companies and their banks or underwriters that state that only Big Four audit firms can provide audit services to the company’. Mid-tier firm partners also went on record in their Lords evidence that they have personally come across such agreements. Such artificial barriers to competition must be eradicated, on the grounds not only of equity, but also of pragmatism. If there were to be a failure of one of the Big Four, restrictive covenants would prevent companies from using other audit firms, which would leave only three to choose from, Given that the OFT is now extending its remit to look at audit competition more widely, we would hope that lenders and shareholders in all countries not only reject such covenants, but think more creatively about their auditor requirements in general. 1. AUDIT CONCENTRATION 3 (b) Liability The other key issue is liability. Auditors, like other professional advisers, will normally owe a duty of care to the entities that they audit. This will involve a responsibility in law to carry out their work with the skill and competence that society, and end-users, should be entitled to expect. Where this duty exists, and where the work is not carried out to the standard required, those end-users will have the right to take legal action against the auditor to seek compensation for any loss that his negligence has caused them. This exposure to liability is usually seen as a good thing, since it concentrates the minds of advisers and drives quality and ‘customer care’. If advisers were not motivated by the prospect of retribution for poor quality work there might be a danger that they would fail to exercise the right level of skill and care. For this reason we do not advocate freeing auditors from liability for their mistakes and sub-standard work, although we do think the example of Andersen, which collapsed after the Enron scandal ruined its name, shows that reputational risk equals financial risk as an incentive to give the best advice possible. Nonetheless, ACCA does believe that, in some cases, rules on auditors’ liability can be unreasonable and lead to undesirable consequences. We refer here, in particular, to the basis of joint and several liability that exists in the UK and many common-law-based jurisdictions around the world. Under this system, a person who has been owed a duty of care, and who claims to have suffered loss, can sue all or any of the parties alleged to have caused that loss. The key point here is that where one of the parties is considered to be better off, and hence more likely to be in a position actually to pay the damages claimed, the plaintiff can choose to sue just that party, with the others being effectively let off. Because auditors must have professional indemnity insurance, they have often been regarded as the best targets – so-called ‘deep-pocket syndrome’. 4 This state of affairs is likely, in our view, to have at least two unfortunate results. First, if auditors are so constrained by the threat of being sued, they will be reluctant to get involved in innovative work that might actually produce real benefits to stakeholders. In fact, the auditing profession has been accused regularly over the years of being too conservative and of couching reports in defensive, legalistic terms because of the concern to avoid litigation. At this time, when stakeholders and regulatory bodies are increasingly looking for auditors to provide assurance on new areas, such as the effectiveness of companies’ risk management, we need auditors to be willing to expand the scope of their work, which will not happen without the removal of the threat of litigation that could destroy them. Second, and directly relevant to the issue of competition, the threat of being sued on an unlimited basis is likely to be a disincentive to smaller firms to get involved with the audit of large companies. Even if a firm considered itself to have the skills, experience and resources to take on the audit of a large company, it might well be forced to refrain from tendering for such an engagement if the financial risk associated with audit failure would be sufficient to wipe out the firm. It should be noted that countries that have some form of statutory restriction of liability have succeeded in increasing the pool of audit firms operating in the listed company sector. A good example is Germany, which has had a cap since 1931 (currently 4m euros) – while the biggest companies are all Big Four clients, 34% of smaller listed companies are audited by firms outside the top eight. The EU issued a formal Recommendation to member states in 2008 to encourage them all to limit liability for audit work – this followed a review which concluded that there was no evidence that limitation of liability, either by statutory caps or other means, had any detrimental effect on the quality of audit work. Getting the right sort of liability regime is not easy. In 2006, the UK government moved to allow contractual limitation of liability agreements, but these have proved almost unworkable in the listed company sector, partly because shareholders have been very reluctant to give up their rights to sue auditors, but also because US authorities have been hostile to the practice, viewing it as a threat to audit quality. Since the year 2000, Australia has reformed the whole basis of its federal law on civil liability. In the wake of a national crisis over the availability and cost of professional indemnity insurance (which saw audit firms’ premiums rise by up to 400% in some cases), it has replaced the principle of joint and several liability (at least in cases involving economic loss and damage to property) with a general assumption of ‘proportionate’ liability, in which the plaintiff is entitled to sue each wrongdoer who he considers bears some responsibility for the loss he has suffered, and each wrongdoer will only be liable for that share of the plaintiff’s loss which arises from his own negligence, as decided by a court. This new system applies to the work of company auditors via changes made to the federal Corporations Act. would facilitate greater competition from non-Big four firms. These firms have publicly stated in their submissions to the Lords and EC that lack of money is not what restricts them from tendering for large audits – rather it is the belief that as things currently stand they would be unlikely to be successful, and so they avoid the time costs of tendering. This also means that the supposed ‘solution’ of amending rules on ownership of accountancy firms and generating external investment is not the answer. Many other problems and potential solutions have been raised in the current debate and we assess them here. The introduction of proportionate liability in federal civil cases is in addition to legislation already in force in some Australian states, which allows for the statutory capping of professionals’ liability. In New South Wales, for example, the liability of an auditor is capped at ten times the audit fee for the assignment concerned. No system is perfect, but on balance ACCA is attracted to the concept of proportionate liability as offering a solution which reflects the reality of the auditor–client relationship but which still allows a plaintiff to recover the whole of his claim where the defendant is solely at fault. Although such action in the area of liability is not a panacea for an intractable problem, we do believe that, together with moves to eradicate restrictive covenants, it Audit under fire: a review of the post-financial crisis inquiries 1. AUDIT CONCENTRATION 5 2. Audit independence The EC Green Paper and the subsequent discussions in Brussels have concentrated in particular on three interlinked issues to do with increased audit independence. The first is the provision of non-audit services by auditors to clients, the second is mandatory audit rotation and thirdly, joint audits. It seems that while many of the initially large number of possible areas of action have now gone, these three are still the likeliest sources of proposals for legislation. (a) Non-audit services For many years politicians and other commentators have been exercised by the issue of auditors’ provision of additional services to their audit clients. In the recession of the early 1990s, there were claims that firms ‘low-balled’ – ie cut their audit fees in order to get a foot in the door for more lucrative non-audit work. Then in 2001, following Enron and the demise of Andersen, the argument came up again. How could firms possibly perform properly independent audits when their eyes were fixed on the bigger consultancy prize? The introduction of the Sarbanes–Oxley Act (‘Sarbox’) in the US in 2002, which established the Public Company Accounting Oversight Board (PCAOB), was the result. In 2007, as the credit crunch began, a UK Treasury Select Committee into the failure of Northern Rock bank referred to this issue and then in 2009, another Select Committee into the banking crisis, declared: ‘We strongly believe that investor confidence and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work for the same company, and recommend that the FRC consults on this proposal at the earliest opportunity.’ that the Select Committee’s recommendation was based on the views of ‘certain representatives of the investor community’ and ‘particular commentators’, none of whom were named but who included at least some who could reasonably be described as ‘frequent critics of the audit profession’. The APB lamented the lack of evidence used in the arguments – ‘these views are based predominantly on the perceptions and opinions that different stakeholders hold, and not a proven track record linking audit failures with a lack of objectivity’. Yes despite that report, the Lords have now come out with a similar conclusion to the 2009 Select Committee. Although they were ‘not convinced that a complete ban on audit firms carrying out non-audit work for clients whose accounts they audit is justified’ the Lords nonetheless recommended that auditors should be prohibited from providing internal audit, tax advisory services and advice to the risk committee. The US is the only significant jurisdiction, so far, to act in this way – nine services are on a prohibited list, under Sarbox, although ‘pre-approval’ can get round this on occasion. It seems very likely that the EC will go the same way and establish a list of such activities, although it will not simply import from Sarbox. ACCA’s view is closer to the APB’s. Policy decisions must be based on evidence, not assumptions and in fact, the figures, courtesy of Financial Director magazine, 3 show 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 plunged to 71% in 2008. For a subject where the debate too often generates heat rather than light these are telling figures. The FRC’s Auditing Practices Board (APB) did just that. And its discomfort was clear in its report, which observed 3. 1. http://www.financialdirector.co.uk/financial-director/ analysis/1744271/pounds-sense-fds-audit-fees-survey-2009 6 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, and the extra insight of the incumbent audit firm into the business brings quality and efficiency benefits that businesses would not wish to lose. The ability of small accounting firms to offer wide-ranging services as business advisers is of proven value to small and medium-sized enterprises (SMEs), a view supported by research. While we do accept that there is a strong case for external auditors to be excluded from internal audit work – and we would be happy to examine other areas on a case-by-case basis – we do not believe that tax advisory work should be included on any prohibited list. Most companies would be rightly aggrieved at having to take on another firm of advisers to do tax work, as this seems costly and unnecessary. There is also a wider point here. We believe audit training is a crucial part of being an accountant and a blanket ban on the provision of non-audit services to audit clients would start to position audit as a specialist activity, rather than a central part of business governance that adds wider value to business leaders. This would not help bring talented people into the profession. Nonetheless, the non-audit issue has always been a difficult case for the profession to make to a sceptical audience – and the financial crisis has stripped away any inclination the EC had to give auditors the benefit of the doubt. Sometimes realpolitik is too strong and it seems that a Sarbox-type list of prohibited services will be replicated in Europe, but the outcome must not be the drastic option of ‘audit-only’ firms, which would lead only to a serious reduction of talent entering the profession. That simply has to be avoided. Audit under fire: a review of the post-financial crisis inquiries (b) Mandatory rotation In evidence presented to the Lords’ inquiry, several headlines were generated by the fact that the average tenure of one of the Big Four firms is an eye-catching 48 years. This was deemed to be clear evidence of the need for change. Although it is hard to argue that a firm can be external auditor to a company for 30 years without becoming part of the ‘organogram’ of the company, ACCA does not agree with mandatory rotation of firms after a set number of years. The problem is that, unless the wider problems surrounding competition can be addressed, merely insisting on a change of audit firm will probably lead to one Big Four firm replacing another. And quality could be needlessly threatened if a short number of years was fixed – given the scope and complexity of modern international businesses, especially banks, the necessary knowledge built up by the audit firm would be lost too soon. We believe it is better to stick with the existing rules on audit partner rotation – if the lead partner has to change reasonably regularly, it should help to prevent threats to auditor independence. Companies already sometimes complain when the lead partner changes too often and continuity is lost, although a suitable balance has to be struck. The Lords – while rejecting mandatory rotation – nonetheless proposed compulsory tendering every five years, with at least one non-Big Four firm involved. The audit committee would have to give detailed reasons to shareholders for their choice, which is a proposal currently being pushed by the UK FRC, as part of its general exhortation for audit committees to play a bigger role in governance. 2. AUDIT INDEPENDENCE 7 ACCA strongly supports the idea that audit committees should explain their thinking to investors in this way – the committees are there, after all, to protect the shareholder interest. This is far better, ACCA believes, than the idea, floated in the post-mortem of the crisis, that regulators or other third parties should appoint auditors. Appointing auditors is a key part of the governance of the company and it should be the company’s audit committee, who have knowledge of the company, that makes the choice and is accountable for it. This also prevents any allegations of corruption, which could arise if a third party determined which firm gets the work. Detailed disclosure of the reason for the choice would also help to prevent the unwelcome spread of so-called ‘restrictive covenants’, mentioned earlier. Auditors should have to demonstrate their superior service, rather than this simply being assumed. But it would nonetheless be wrong to assume that mandatory tendering will be a panacea. Non-Big Four firms are already reluctant to take on the considerable costs of tendering, knowing they are unlikely to oust one of the Big Four. So without other more effective measures to boost competition, compulsory tendering may simply add costs with no benefit. (c) Joint audits Joint audits are another idea being floated in Brussels – but at the EC’s two-day conference on audit and accounting in February 2011, it was noticeable that loyalties divided sharply along national lines. French firms and regulators praised the use of two firms as being a success in France – both on the basis that ‘two pairs of eyes are better than one’ and because the system allowed smaller firms to get exposure to listed company audits. UK and German speakers, on the other hand, condemned the approach as costly and ineffective. It can be argued that there is some logic in giving a smaller firm at least some experience of larger companies by allowing it to audit the subsidiaries while a bigger audit firm does the consolidated group accounts. There is, however, a danger that this could be a tokenistic development while the real power remains in the larger hands. 8 ACCA would, on the whole, agree with the Lords, who were not convinced that joint audits would be better but argued that they would increase costs and bureaucracy. We also believe there is a real danger that either work would be duplicated or would fall between the cracks with both auditors leaving it to the other. The Parmalat case in Italy showed the potential risks of joint audits. Nonetheless, as some mid-tier firms have argued, something has to be done to overcome ‘Big Four’ dominance and there are no easy answers, as we have already seen. Joint audit and mandatory rotation may appear to be unconnected issues, but the EC does seem to think that one of them should be introduced to increase competition. If the EC or a major policymaker insists on a substantial change, then joint audits would at least be preferable to mandatory rotation.