Commercial conflicts of interest and poor legal compliance are putting the quality of company audits at risk, the UK accountancy regulator has warned.
The Financial Reporting Council's warning followed its first independent assessment of the industry that included an inspection of 27 audits of leading UK companies. The FRC assumed new powers last year to boost investor confidence in corporate reporting following scandals such as Enron and Parmalat.
The FRC on Monday referred two FTSE 350 audits to its review panel the arm that examined MG Rover's accounts because it was concerned that accounting rules had not been applied correctly and relevant information had not been disclosed. But it said that reported profits were not at issue in either case. Sir John Bourn, chairman of the FRC's Professional Oversight Board for Accountancy, said: “The quality of audits is under threat from a number of risks not being addressed by all [accountancy] firms in all audits.”
The regulator has assumed many of the accountancy profession's previous self-regulatory powers and focused much of its attention on audits, which safeguard against financial fraud and reporting misdemeanours.
Sir John unveiled a list of 21 areas where the Big Four accounting firms PwC, Deloitte, KPMG and Ernst & Young needed to improve. But he emphasised that the FRC had not uncovered systemic weaknesses in audit policies, procedures or systems.
He said: “Global capitalism is not going to fail because auditors are not effective, but auditors could do better.”
The FRC emphasised that the country's audit framework was appropriate and that the “great majority” of audit judgments were sound.
But Sir John highlighted the fact that accountants' commercial priorities sometimes appeared to take precedence over audit quality.
“The documented goals and objectives established for partners . . . focused mainly on commercial considerations, such as revenue growth and profitability,” the report says.
The regulator also expressed concern over the independence of some senior auditors. Accountancy firms must rotate lead audit partners every five years, but the FRC noted that many outgoing partners maintained relationships with clients. Sir John said: “There may be cases in which they don't know they're unduly influenced.
“The finance director says: ‘The new audit partner doesn't quite understand what we're all about. Would you have a word with him?' This is the kind of thing that diminishes independence.”
The Institute of Chartered Accountants in England Wales said: “Standards of UK audit are among the best in the world and the profession is always willing to examine ways in whichcurrent approaches can be improved.”