Accountancy & Management: Reform ideas floated and shot down: The APB paper on auditing's future is under attack from all sides

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The Independent Online
THE Auditing Practices Board never expected to win universal approval for the paper on the reform of auditing it published late last year. Nevertheless, it must have been taken aback by the strength and variety of opposition.

Part of the problem can be attributed to the fact that, although the report of John McFarlane's working party, The Future Development of Auditing, was presented as a document designed to stimulate debate, it has been widely viewed as a set of firm proposals that will be put into practice if not vigorously attacked.

Conversely, though, the wideness of the report's ambit is seen by some as problematical. By seeking to deal with all the criticisms of a complicated area of business at once, they say, the report is trying to do too much and as a result is not always adequately developed. To which, the APB replies that many of the ideas in the document were just being floated for comment.

Misunderstandings abound, then. But are they genuine, or just excuses for a harassed profession to avoid doing anything meaningful?

The latter appears to be the view of the Labour MP Austin Mitchell, who - with the academics Tony Puxty, Prem Sikka and Hugh Willmott - issued a response the day after the 31 March official closing date for comments.

Long regarded by the accountancy profession as a thorn in its side, Mr Mitchell could perhaps have been predicted to side with John McFarlane, a non-accountant who is managing director of Citibank UK, against the auditing firms. But not a bit of it.

He and his colleagues, in a discussion paper entitled A Better Future for Auditing, lambast not just the APB but also the Cadbury Report on Corporate Governance for 'their failure to make suggestions for reform relating to self-regulation, accountability of the accountancy profession, accountability of the auditing firms, the profession's role in creating and sustaining the expectations gap. . .'

Some of the paper's suggestions for reform are echoed by the Chartered Institute of Management Accountants, which, for instance, proposes that auditing be a separate profession from the rest of accounting. Under its proposal, audit firms would be barred from providing any other work to the company to which they are auditor and the profession would be regulated by an outside body.

But the firms are going to have no truck with the idea that auditors should owe a duty of care to all stakeholders, rather than just those defined by the Caparo judgment, combined with no capping of their liability.

For example, Price Waterhouse says in its submission: 'The risk of litigation stands in the way of any possible quantum leap in auditor reporting, as auditors too often carry the financial burdens of others in this respect.'

KPMG Peat Marwick, where the APB chairman, Bill Morrison, is deputy senior partner, is even more direct. 'The penalty needs to be fairly apportioned between all parties at fault; it will be rare for the auditor to be the only - or indeed the most - guilty party. We will support steps to ensure that directors of public interest companies carry indemnity insurance.'

But, if the repeated delays to the consultation document on the small- company audit are anything to go by, there is a danger of the liability issue overhanging the whole debate for some time to come. Indeed, the only sign of movement by the Department of Trade and Industry has been the April Fool's joke in the current issue of the English institute's Accountancy magazine. And such is the gravity with which the issue is considered, the false report of a scheme to limit liability has been badly received in some quarters.

Even Coopers & Lybrand, which recently called a press conference to criticise colleagues in the profession who have been dragging their feet over the APB report, feels that 'a practical solution to the auditor liability problem is urgently needed'.

This will no doubt be one of the areas examined more closely by the task forces of people unconnected with the original document that Mr Morrison says will be established to follow up the responses. Such is the weight of evidence collected, with more still trickling in, that it will be some months before a full report can be produced.

In the meantime, the debate continues - a sign that the report has succeeded in its main purpose, he adds. Today, he shares a platform at a conference of accountancy academics at Strathclyde University with Austin Mitchell, and further events are planned in the drive to keep the momentum going.

'There are obviously one or two areas that won't run. Some are finely balanced and some have great support. We're not downhearted,' Mr Morrison said, stressing that he would rather have a lot of response and therefore extra work than no response.

However, while pointing out that much of the debate had proved constructive, he admitted disappointment at a forum held at the English institute earlier this year. While the senior echelons of the body have been broadly supportive - though not uncritical - the event was dominated by representatives of smaller firms insisting that the APB paper dealt with a problem that was nothing to do with them.

The Chartered Association of Certified Accountants, which has a strong base among the smaller firms, has made a great effort to distinguish itself from this view in its response published yesterday.

The organisation, whose president David Bishop has also spoken out strongly on the case for small company audits, insists that any changes to the scope of the audit must apply to all companies regardless of size. The reason for extending external audit responsibilities is 'to be able to make better judgements on consistency, prudence and the going concern concept' - which applies to all operations, big or small.

The certifieds have, moreover, probably put a finger on the rationale for much of the criticism by pointing out that the suggested changes pose a challenge to auditors to move from a 'traditional financial role into an unfamiliar and multi-disciplinary activity'. And to do this requires new skills and fresh approaches.

The danger is that some may think they have a choice. Roger Davis, head of audit at Coopers & Lybrand and a member of the McFarlane working party, is adamant that this is not so.

'If the auditing profession fails now to accept the need for change, there is a serious risk that it will face a decline in relevance and influence over the coming decade - and be unable to attract talent into its ranks,' he says.

'To close down the debate on the future of auditing would demonstrate a complacency out of step with the times.'

(Photograph omitted)