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Aiu Audit monitoring

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2 Bloomsbury Street Our ref: njt London Your ref: WC1B 3ST Tel: 020 7413 5100 Fax: 020 7413 5101 DX:1040 London/Chancery Attn; Christina Trickett Professional Oversight Board of the FRC 5th Floor Aldwych House 71-91 Aldwych 22 September 2006 London WC2B 4HN Dear Sirs Audit Quality Monitoring We welcome the opportunity to respond to your consultation document in connection with reporting on audit quality monitoring. Audit quality is paramount and we are fully supportive of the FRC position. Your paper sets out clearly the background to the reporting debate but we feel that it should also be read in the context of the current wider debates concerning auditor liability and the issue of competition in the marketplace. We do not consider the three topics to be mutually exclusive and this is referred to further below. To put the debate in perspective, the AIU monitors the quality of auditing of economically significant entities with the overall objective of raising audit quality and hence maintaining confidence in the veracity of financial reporting to the capital markets. This is achieved by way of extended visits to audit firms concluding with a detailed private report to the firm and a generic report to the wider market. Calls for the publication of private reports on the grounds that it would “better serve the public interest” and that publication “may demonstrate that firms outside the Big 4 can do ...

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Publié par	Thyas
Nombre de lectures	17
Langue	English

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Our ref:

njt

Your ref:

Dear Sirs

Audit Quality Monitoring

We welcome the opportunity to respond to your consultation document in connection

with reporting on audit quality monitoring. Audit quality is paramount and we are

fully supportive of the FRC position.

Your paper sets out clearly the background to the reporting debate but we feel that it

should also be read in the context of the current wider debates concerning auditor

liability and the issue of competition in the marketplace.

We do not consider the

three topics to be mutually exclusive and this is referred to further below.

To put the debate in perspective, the AIU monitors the quality of auditing of

economically significant entities with the overall objective of raising audit quality

and hence maintaining confidence in the veracity of financial reporting to the capital

markets.

This is achieved by way of extended visits to audit firms concluding with a

detailed private report to the firm and a generic report to the wider market.

Calls for the publication of private reports on the grounds that it would “better serve

the public interest” and that publication “may demonstrate that firms outside the Big

4 can do large listed audits” are both judgemental and will do little to address the

issue of competition in the marketplace. In our opinion, it is not audit quality that

distinguishes the Big 4 from other firms. With the exception of the audits of only

truly global companies and those with specialist auditing requirements, significant

firms outside the Big 4 can, and do, undertake this work and it is, inter alia, the

reticence of audit committees and finance directors to pursue other options that lies at

the heart of the competition debate.

Some commentators have attempted to group these debates together, perhaps in the

mistaken belief that the AIU process might provide some kitemark of quality that can

be used for the purposes of market positioning. This is plainly not the case and we

believe it is naive to assume that it could ever be so. The AIU process is focussed on

identifying opportunities for improvement in quality not on benchmarking

22 September 2006

Attn; Christina Trickett

Professional Oversight Board of the FRC

5th Floor

Aldwych House

71-91 Aldwych

London

WC2B 4HN

2 Bloomsbury Street

London

WC1B 3ST

Tel: 020 7413 5100

Fax: 020 7413 5101

DX:1040 London/Chancery

Audit Quality Monitoring contd.

Baker Tilly

22 September 2006

njt

performance between dissimilar firms. We believe that the current process is very

effective at focussing on quality improvements and allows for full and frank

discussions between the audit firms and the regulator. Preparation of detailed reports

for public consumption would involve increased costs, additional resource, detailed

legal review, time delays and, inevitably an anodyne, boilerplated report which is

likely to have little impact on audit quality or perceptions of quality.

Misplaced comments could be detrimental to firms, clients and potentially the

operation and competitiveness of capital markets. Furthermore a "name and shame"

approach runs completely counter to the light touch regulation which underlies the

operation of much of the UK capital markets and governance regimes. It would

significantly change the dynamic and the dialogue between the regulated and the

regulator.

Audit committees can best satisfy their duties in assessing auditor effectiveness by

rigorously reviewing actual performance in the conduct of the audit of a companies

financial statements. If they wish to test performance against other audit firms they

can do so by inviting tenders from those firms. The fact that switch rates are so low

(<3% on average) implies that dissatisfaction is low. In reality, audit committees and

others may be better served by the transparency reporting requirements for auditors

of public interest entities that are proposed under the EU 8th Company Law

directive

and which are subject to a separate consultation.

Furthermore, the publication of reports that intentionally identify only areas of

weakness in a firm’s systems and procedures is, in our opinion, inconsistent with

maintaining confidence in the capital markets.

Negative based reporting, as a statement of intent, invites legal challenge and a firm

will in reality never achieve a “clean” report.

We consider that the AIU reporting

mechanism to the relevant Audit Registration Committees is incentive enough for

firms to constantly improve audit quality and both the firms and the AIU should

continuously seek to raise the quality bar.

The loss of audit registration could

effectively destroy a firm.

The link to auditor liability should also not be lost.

The publication of private reports

is effectively a “litigator’s charter” and the points on boilerplate reporting and delays

to publication are very well made and should certainly be emphasised in the overall

debate.

A firm will rigorously defend its reputation (and arguably its very existence)

by all means available to it.

The current modus operandi in terms of negative based

reporting will almost certainly require review, particularly when the approach is

likely to have to be relied upon in court.

Effectively the AIU will be acting as

prosecutor, judge and jury which in many cases may be based on their judgement of

someone else’s judgement…..hardly robust, transparent or, indeed, supportable.

The boilerplating case is well demonstrated in the PCAOB method of reporting

where their reports state that “…..a Board inspection should not be understood to

provide any assurance that the firm’s audits, or its issuer clients’ financial statements,

are free of any deficiencies not specifically described in an inspection report.”

Firms

Audit Quality Monitoring contd.

Baker Tilly

22 September 2006

njt

in the US then have twelve months to action PCAOB recommendations or face the

possibility of their private reports being made public.

It is interesting to note that,

since January 2005, over 330 reports have been issued by the PCAOB, none of which

to our knowledge has been made public.

This is surely evidence enough that firms

take the inspection process seriously and that audit quality improvements are being

implemented by firms continuously.

This achieves the very objective of the AIU

itself.

The audit committee transparency debate should also be viewed in light of the

differences between the US and UK regulatory positions.

The ability of audit

committees, the press or other commentators to benchmark the relative performances

of 330 firms is far more onerous than for the 9 firms currently reviewed in the UK.

At worst, a whole industry will be created in the UK in an attempt to rank firms, with

any outcome dependent, potentially, on the interpretation and context of individual

words or sentences within an overall report.

Again, a boilerplating approach will be

adopted by firms with little or no progress being made in achieving the stated

objective of improving audit quality.

The evaluation criteria of audit committees

would then be, seemingly, to select the “least poor” firm.

The rate of change faced by the auditing profession over recent years has been

extraordinary both in terms of the quantum of new accounting requirements and the

transition, from both an accounting and auditing viewpoint, to International

Standards.

The recent round of AIU visits concentrated, in the main, on compliance

with SAS’s and the next round will be under ISA.

Firms’ policies and procedures

have coped well with these changes and AIU comments during this transition stage

must be taken in that context.

Procedures continue to be enhanced and publication of

private reports during this period may be ill-timed and indeed, in some cases,

misleading as to the audit quality standards of that firm.

We would recommend,

therefore, that there be no changes to the reporting methodology at the current time

provided that the AIU continues to raise the quality bar with firms and that firms, in

turn, respond positively to the findings.

Should a firm fail to respond appropriately

to the agreed AIU findings, we consider that the mechanism is already in place to

effect necessary action, namely by referral to the relevant Audit Registration

Committee.

In conclusion, we consider that there are a number of interlinked issues surrounding

the report publication debate, none of which can be taken in isolation.

The various

agenda, ranging from liability issues through to audit concentration and perceived

competitive advantage by some, must not detract from the overriding objective of the

AIU which is to monitor and enhance audit quality for economically significant

entities….nothing more, nothing less.

Yours faithfully

Nigel Tristem

National Head of Audit

Univers
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