'EC proposals will decrease the quality of auditors' work'.Effective auditing remains one of the fundamental building blocks required to create trust. This is particularly important at a time when we are experiencing increasing complexity, both in business and in the international accounting standards that govern how we recognise, measure and report the underlying transactions. Without this trust in the corporate reporting system, the reports produced would become fatally devalued de·val·ue also de·val·u·ate
v. de·val·ued also de·valu·at·ed, de·val·u·ing also de·val·u·at·ing, de·val·ues also de·val·u·ates
1. To lessen or cancel the value of. , and could be justifiably ignored.
Responding to recent corporate failures at Anglo Irish, Lehman Brothers Lehman Brothers Holdings Inc. (NYSE: LEH), founded in 1850, is a diversified, global financial services firm. It is a participant in investment banking, equity and fixed income sales, research and trading, investment management, private equity, and private banking. and Olympus, Michel Barnier, the internal market commissioner for the European Commission, has proposed a reform of the audit market in Europe, including the mandatory rotation of audit firms every six years and a complete ban on non-audit work for existing clients.
In our view, the EC's proposals should be moving the auditing profession in the opposite direction. Instead of recommending something that will decrease the quality of the work, we need to be doing everything possible to increase the proficiency of auditors.
The systemic impact of some recent failures, notably among the banks, is a particular worry. People would justifiably like to get more out of audits, making them less a quality check on the past's financial figures and more of a test of the future resilience of the business. However, my view is that Barnier's proposals would be bad for business and, worse, would represent a missed opportunity to enhance the public interest value of auditing.
Specifically, it is most unlikely that the EC's proposals could have prevented any of these failures, or the more widespread global financial crisis. Take, for example, the recommendation that a company be required to change its auditors every six years on the assumption that this will increase the independence and objectivity with which an audit is conducted.
This assumes that the new auditor is as well informed as the previous auditor and, therefore, able to immediately do its work as comprehensively. On the contrary, it will take years for the new auditor to duplicate the knowledge of the previous company. As a result, investors and the public will be less, rather than more protected. That makes no sense when increased rather than decreased insight is what's needed to understand the business. Additionally, the changes threaten significantly increased costs if the business has to implement a time-consuming and expensive search for a new auditor every few years.
The same is true of the EC's proposal to prevent audit firms from providing non-audit services. Clearly, there should be conflict-of-interest protection, but the proposal to prevent an auditor from providing non-audit consulting services to any corporate entity regardless of whether or not it undertakes the firm's audit, makes little sense from any perspective.
This debate is doubly important because businesses from outside the European Union are not immune from the effects of the proposed changes. Globalisation is widening the impact of national and regional legislation and, like the US's Foreign Corrupt Practices Act Foreign Corrupt Practices Act
An amendment to the Securities Exchange Act created to sanction bribery of foreign officials by publicly held US companies.
Foreign Corrupt Practices Act , the EC's proposals could have global reach.
The big four audit firms may have to reorganise Verb 1. reorganise - organize anew, as after a setback
form, organize, organise - create (as an entity); "social groups form everywhere"; "They formed a company"
2. their businesses to separate their audit and non-audit businesses; this is unlikely to happen just in Europe. Organisations from non-EU countries could well be affected from this reorganisation and realignment re·a·lign
tr.v. re·a·ligned, re·a·lign·ing, re·a·ligns
1. To put back into proper order or alignment.
2. To make new groupings of or working arrangements between. of the global audit sector.
This is not to say that change is unnecessary. On the contrary, as CIMA has consistently suggested, independent assurance of non-financial data, narrative reporting and the internal processes that produce the data used by boards in their decision-making would have a significantly positive impact.
If we are to move forward, we must ensure that all these criteria are brought into the equation, and that the right balance is reached to make auditing a broader and more robust tool of assurance.
Charles Tilley, FCMA FCMA Faith Centered Music Association
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