Accountancy & Management: In the last-chance saloon: The profession has its work cut out to convince the public that it can regulate itself, says Roger Trapp

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The Independent Online
NEVER mind the press, there is a growing feeling that Britain's accountants are, in David Mellor's memorable phrase, 'drinking in the last-chance saloon'. The accountancy profession - in particular, the auditing side - is increasingly being perceived as not prying enough.

One of the main problems relates to the concept of the 'going concern'. How is it, investors, MPs and the public ask, that a company can receive a clean audit report and collapse soon after?

The question is not new. As Prem Sikka, an accountancy academic at East London University, relates in a paper published last week, disquiet over audit failures in the early 1970s was partly behind the setting up of the Auditing Practices Committee. This was abandoned after little progress had been made. But against the background of the secondary banking crisis and property market crash of the mid-Seventies, a replacement committee was formed and set about formulating a guideline on going concern.

Mr Sikka claims that, rather than setting out to raise standards, the professional bodies were seeking to manage a crisis of auditor responsibility. 'It suggests that a main aim of the guideline was to minimise audit effort in order to give maximum protection from litigation to major auditing firms.'

The successor to these two bodies, the Auditing Practices Board, was set up in 1991 when the economic downturn was helping to bring about spectacular corporate collapses such as Polly Peck and BCCI. Late last year, a working party of this body produced a widely welcomed report, The Future Development of Auditing.

The document was noteworthy because it attempted to stand back from the issues and examine, for instance, the roots of the 'expectations gap'.

As its subtitle suggested, it was designed to stimulate discussion. And that public debate moves on a stage tomorrow, when John McFarlane, managing director of Citibank UK and leader of the working party, takes part in a forum at the Institute of Chartered Accountants' headquarters in the City of London. He is due to be joined by Stuart Bell, Opposition spokesman on trade and industry, Bill Morrison, deputy senior partner of KPMG Peat Marwick and chairman of the APB, and Peter Davis, deputy chairman of Sturge Holdings and chairman of the ICA's Board for Chartered Accountants in Business. The meeting will be chaired by Martin Scicluna of Touche Ross, chairman of the ICA's auditing committee.

'The McFarlane report and our response to it will shape auditing into the next century. It was issued to promote public debate, and the institute has created this forum to ensure that all points of view can be heard,' Mr Scicluna said.

But this cuts little ice with Mr Sikka, a long-time critic of the profession who believes that the institute and related organisations are less professional bodies than trade associations. He says it is impossible for them to impose standards and regulate themselves.

The absence of an independent viewpoint has contributed to the development of a passive approach to the going concern guideline, he adds.

If there were an active approach, auditors would be required to search for signs that might suggest a business may cease trading in the near future. The passive approach is not so stringent. It requires an auditor to carry out additional procedures only if the normal audit work reveals some contrary evidence.

But in his article 'Audit Policy Making in the UK' published in the latest issue of the European Accounting Review, Mr Sikka suggests that the lack of homogeneity in the profession is also to blame.

'Industrial/commercial accountants had little direct say in audit policy making. Small practitioners and their concerns were marginalised. Assumed users were not explicitly consulted,' he writes. Instead, the guideline was developed under the influence of the big firms, but was seeking to provide a 'world view' for everybody.

A survey of 300 auditing firms by Mr Sikka last year suggests this passive approach was not universally accepted, but was mainly confined to the top 20 firms.

It is, then, not too surprising that the profession has shown some signs of moving to plug the 'expectations gap'. Recent months have seen a general shift towards attempts to provide a more worthwhile, cost-effective audit that does not leave firms open to lawsuits.

But just as this movement was gathering pace along came the various bodies' first annual reports to the Department of Trade and Industry on audit regulation under the European Community's Eighth Company Law Directive. While the surveys of chartered, certified and public acountants all found widespread procedural problems, it was claimed that this did not mean that there were any significant shortfalls in the standards of work.

This suggests a certain complacency by would-be regulators. Combined with an apparent inability to impose serious sanctions against senior members, it shows that there is still a long way to go before the general public is satisfied that the profession can keep its house in order.

(Photograph omitted)