In search of guiding principles Rigorous rules may help accountants in their battle against fraud and lesser ev ils, but they are worthless if they leave no room for judgement, hears Roger Trapp

`We need greater responsibility on the part of accountants'
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Spectacular corporate collapses may be becoming less frequent but they still figure large in the minds of auditors. So it is hardly surprising that the profession has sought to blank out the nightmares by tightening the rules concerning the way i t carries out its duties.

Understandable as this may be, it is not a logical progression as far as Gerry Acher is concerned. The head of audit and accounting at KPMG Peat Marwick believes that "blinding faith in rules" can create as many problems as they solve. "Because you've followed the rules you can be led into the belief that the accounts are the right accounts and the most useful accounts to the shareholders. And I think that's a big myth," he says.

Mr Acher, recently appointed the first head of the Institute of Chartered Accountants' audit faculty, is convinced the profession has a limited period in which to stop its work sliding towards being a commodity product. "All the rule book achieves is to turn the preparation of an audited set of accounts into a compliance operation," he adds.

Some would suggest that that has already happened. Look, they might say, at the widespread accusations of "lowballing" and the suspicion that firms use the audit as a loss leader to gain more lucrative services. Or at the excitement in the small businesscommunity at the ending of the statutory audit requirement for many of them.

But Mr Acher is adamant that his firm - the largest auditor in Britain - will not indulge in such practices. And he points to the recent rise in fee income from this division as a sign that it can pick up prestigious audits without being the lowest bidder. He even suggests that clients are starting to recognise that obtaining value from the audit is of fundamental importance to the company, and is something they are prepared to pay for.

The way to respond to that is, not by writing better rules, but by returning to principles. "When you're in difficult times, judgement is vital," he says.

He acknowledges that such an approach did not work well in the expansionist 1980s. Then, company directors and accountants were able to use their judgement to create the accounting treatments held up to criticism and not a little ridicule in Terry Smith's Accounting for Growth.

But two things have changed since then, suggests Mr Acher. The first is the impact of audit liability, which is concentrating minds in the accountancy profession and leading to a greater focus on risk management.

As is now well known, KPMG is considering turning at least its audit practice into a corporate body in an effort to combat increasingly large law suits. But Mr Acher says this would not stop individual partners being held responsible for mistakes, espec i ally if the plan in The Audit Agenda, published earlier this month by the Auditing Practices Board (APB), for audits to be signed personally rather than by the firm is adopted.

Second, the widespread introduction of audit committees, as recommended by the Cadbury Report, and the setting up of the Financial Reporting Review Panel as an accounts watchdog are together making it easier for auditors to take a robust approach.

Moreover, Mr Acher sees signs that "the mood has changed, particularly with responsible companies. They are not looking to go to the edge".

The Accounting Standards Board (ASB) under its chairman, Sir David Tweedie, might be behind this apparent shift from principles to rules because public concern has forced it to deal with a collection of abuses since it was set up at the beginning of thisdecade. But, lengthy and numerous as its pronouncements have been, not everybody is convinced they amount to rules.

For instance, Mary Keegan, a partner with Price Waterhouse, says "it is fashionable to poke fun at the ASB" for being rules-based when it is still at the principles level. Some people may gain the impression that there are a lot of rules because of the length of the standards.

However, she accepts that the ASB's Urgent Issues Task Force may stray into the rule book occasionally. But even this may not be intentional, since Mr Acher accepts that a lot of the detail has arisen from firms constantly seeking guidance.

Suggesting that he and his counterparts at the leading firms constitute a new generation, he says that they "are controlling the technical people" and using their judgement rather than going back to the ASB for help with every little point.

"We need a statement of principles backed by greater responsibility on the part of preparers of accounts, and greater robustness by auditors who are seen to be prepared to stand up more than they are alleged to have in the past," says Mr Acher.

As such, The Audit Agenda, with its attempt to counter the expectation gap that has plagued the profession in recent years, fits neatly with his ideas. But it has been suggested that even that paper falls into the trap of over-reliance on rules. The ide a seems to be that the situation will improve if what needs to be done can be set out more clearly. The problem with that is it does not appear to take account of those who pay no attention to rules or guidelines, or who wilfully break them. Appropriately , the APB devotes much space to the issue of fraud.

Mr Acher, for one, is keen to get into this area - provided clients are prepared to pay for it. After years of defensive statements from the professional bodies pointing out how auditors cannot be expected to detect the actions of determined fraudsters, he thinks it is "intellectually impossible to say that the auditor is not responsible for fraud".

He wants the big accounting firms to get together to see how they can combat fraud more effectively - which, as regular reports demonstrate, is not confined to times of recession or to a few companies.

In the meantime, he will be hosting a debate on "The Future of Accounting - Principles or Rules?" at the Queen Elizabeth II Conference Centre, London, on 18 January. With speakers including Sir David Tweedie, Michael Lawrence, chief executive of the Stock Exchange, and Keith Hamill, the Forte finance director who is chairman of the CBI's financial reporting panel, plus 300 delegates already signed up, it promises to be a lively session. Whether it brings what Mr Acher calls the rules juggernaut to a halt is, of course, another matter.

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