Grant Thornton cautiously welcomes the FRC paper on Audit
Quality BUT warns against prescriptive approach
30 March 2007
Leading business and financial adviser Grant Thornton, today
cautiously welcomed the Financial Reporting Council's (FRC) paper
on promoting audit quality but questioned the timing chosen for its
publication, arguing that any new industry measures it may lead to
should be in the form of guidance and not prescriptive.
"The FRC's paper entitled 'Promoting Audit Quality' provides a
sound analysis of the factors that can impact quality in the audit
market. This is helpful because the paper could be a first step
towards a widely agreed definition of audit quality against which
audit firms can benchmark themselves and be assessed by the market.
It should also help the FRC to take a leading role in the
international debate which is important because much of the UK
system of audit regulation and the wider governance framework are a
model from which many other economies would benefit", said Steve
Maslin, Head of External Professional Affairs at Grant Thornton UK
LLP and a member of the Assurance Advisory Committee of Grant
Thornton International.
However, Maslin questioned the FRC's failure to indicate
how it intended using the results of the consultation. "We are
slightly puzzled as to the industry context in which this is
delivered given all current evidence pointing to widespread
confidence in UK capital markets and auditing. We would favour any
product deriving from this paper being guidance rather than rules,
and based on actual research - the market will simply not welcome
any more box-ticking exercises."
Recent research from the International Corporate
Governance Network (ICGN) shows that share owners feel that they
are rarely consulted on new rules that purport to protect their
interests. In light of this, Grant Thornton suggests that the FRC
consult with share owners, the end users of audit work, before
bringing in any new specific measures.
According to Maslin, the FRC has two possible routes: "We
encourage the FRC to continue its path of raising awareness of
audit quality issues. However, if the paper is a precursor to yet
more detailed rules this is a concern, particularly as the paper
contains a number of apparently unsubstantiated assertions, for
example that the best staff get allocated to 'the best clients' and
that there is no on the job training for auditors".
Grant Thornton also warns that the FRC paper failed to
understand that the environment in which audit firms work will
affect whether there is an adequate pool of talent to carry out
quality audits. Good auditors want the chance to use their
professional skills, judgement and experience; too much box ticking
will cause young talent to desert or ignore the audit profession,
putting the future of audit quality in jeopardy.
"Capital markets and businesses in general need
consistently high audit quality which derives from a vibrant,
sustainable audit profession made up of a sufficient number of
healthy, quality firms from which a range of companies can choose
the audit firm with the "best fit," continued Maslin.
As recent years have been flooded by complex detailed
accounting, auditing and ethical rules, regrettably the opportunity
for training audit staff on real audit issues rather than just
regulatory compliance has come under pressure. To counter this
trend, the FRC could establish a forum to promote issues such as
fraud detection, encouraging audit firms to pass on "war stories"
from experienced to junior audit staff.
"The FRC could help bring together senior partners of
leading firms to identify case studies of fraud that have been
detected by high-quality audit work and pass this on to younger
audit professionals across all firms.", he continued. "It is also
important to ensure auditors are also learning lessons from
failures that were not detected early by the audit
process".
Grant Thornton supports calls by the Audit Quality Forum
for share owners to be provided with better information on
estimates, judgements, risks and uncertainties inherent in the
financial statements. "At present everyone recognises there is a
problem and some believe this is linked to audit quality, but it
relates also to corporate reporting and cannot be addressed through
audit regulation alone. We need to move the debate on from who
should be responsible and what their liability should
be."
"All stakeholders need to get together to work out how to
provide share owners with the explanations they need and the market
with ever improving standards", concluded Maslin.