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AIA

Big Four auditors 'could do better' says Sir John Bourn

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20th Jun 2005
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Audits carried out by the Big Four accountancy firms were found to be "appropriate and soundly based" in first annual review published by the new Audit Inspection Unit.

Introducing the report, Professional Oversight Board for Accountancy (POBA) chairman Sir John Bourn said on Monday that Big Four auditors "do well overall, but they could do better still".

His comment was based on 27 audits carried out by the Big Four covering financial years up to 31 March 2005. The AIU was established as part of the expansion of the Financial Reporting Council's responsibilities in 2004 and the unit began examining specific audits and processes in June last year.

According to AIU director Andrew Jones, the audits were selected on the basis of risk assessments and took up to four man-weeks each.

Jones explained that the AIU's methodology was based on Company Law requirements, current auditing standards and the guidance issued by regulatory bodies such as the ICAEW Audit and Assurance Faculty. The methodology was more challenging that the firms had been used to under institute monitoring and looked at both audit judgements and processes.

On the whole judgements were soundly based, but the AIU noted concern about the standard of documentation provided by the firms. Under proposed revisions to international auditing standards, the oral explanations provided to the unit's inspectors would not be considered adequate to support the audit work performed or the conclusions reached.

In spite of this criticism, the report continued, "The AIU inspections identified no systematic weaknesses in the overall policies, procedures and systems of quality control operated by the firms and indicate that, when properly applied, those procedures and sstems should provide reasonable assurance that appropriate audit opinions are issued by the firms."

The 28-page AIU annual review, which can be downloaded from the FRC website, focused on FTSE 350 companies, all of which were audited by one of the Big Four.

Summarising the findings, Sir John said the regulatory framework was sound, "but is undermined by risks that are not being addressed by all firms in all audits".

Expanding on these risks, the POBA chairman identified the "tone at the top", "What is said about audit quality in internal and external communications is not always reflected in HR practices, where promotion is often based more on leadership and winning new audit business than on audit quality," Sir John said.

Quality is based on the independence of the people who carry out audits, which is why the the revised Companies Act 2004 stipulated that engagement partners should change every five years, he explained. Although the engagement partner did change, it may be that the previous lead partner hangs around in some other capacity.

"The FD might say, 'Can you have a word with the previous engagement partner,'" warned Sir John, undermining the principle of independence, "which really needs to be put into operations".

The third area where Sir John highlighted that audit quality was at risk was weak documentation. "The whole point of documentation is to show what you did and why you reached judgements," he said. AIU inspectors were concerned by the amount of times they had to ask for oral accounts. "Time goes on and memory fades," said Sir John.

In all, the the AIU report put forward 21 recommendations to address the risks identified by inspectors and each of the Big Four firms received private reports on the inspectors' findings. None of the client firms involved were notified that their accounts had been selected for review, as this might have led to "back door" naming and shaming, Sir John said.

Instead, the inspectors would return to firms during the current financial year to see whether they were addressing the concerns raised by the AIU.

While the Big Four were scrutinised in the first year, the inspectors' net would widen this year to cover the next five firms who carry out listed company audits. In 2006/07, the AIU would reach down another level to the audits of other "public interest" such as large pension funds, friendly societies and charities.

With its uncontroversial conclusions and discreet approach, the AIU is likely to come under fire from critics who argue that the UK accountancy profession still hasn't escaped the "chaps regulating chaps" mentality.

Sir John said that the unit's methods had been carefully structured to meet the demands of POBA's sponsors in government, the accountancy bodies and the FRC.

"We could have done a whole process of naming and shaming," said Sir John but the sponsors wanted the unit to produce private reports for firms which would also go to the relevant audit regulation committee.

"The Regulation committee will give instructions which could involve taking away the right to do audits. [And] we have got a right to oversee what the audit regulation committees do. If we see that they haven't responded to our reports, POBA could issue a public report. This is what we were asked to do and this is what we've done."

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By dimudaniel
11th Jul 2005 10:01

Its not like that here!
In Nigeria where the Big four have a presence, there is currently as far I know no Audit inspection unit hence I believe there will be some practices which do not conform to international standards which will be going on. Thus to have such a report in the UK is quite an outstanding effort compared to what obtains in this part of the world. I hope that one day we'll also have the privilege to question our auditors here in order to facilitate professionalism and transparency.

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By AnonymousUser
27th Jun 2005 08:48

Employ AIA members
No AIA member I heard of is sued over their audit practice work. It goes without saying, EMPLOY AIA MEMBERS.

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By User deleted
22nd Jun 2005 13:29

Put it on the file...
I am reminded of a comment made to me by an audit senior when I was a junior trainee many years ago. After I had given him a detailed explanation of a review point, he said: "that is all very well, but we can't staple your head to the file". Has influenced me since!

But surely the Big Four should not have to be told this?

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By ChaseBuckley
22nd Jun 2005 13:30

Duplicitous, verging on the criminal
You utterly misrepresent the facts when you say "It is an unfortunate fact that large firms make easy targets."

These partnerships (now with "limited liability" - for whose benefit?) take money for work they do not carry out or carry out incompetently.

They undertake "Management Consultancy" work for which as Accountants they are not qualified and this Consultancy work is the source of pervasive conflicts of interest & shoddy client service (to say the least).

It most certainly is not "unfortunate" that the duplicitous, verging on the criminal, activities of these firms result in the appropriate redress for client businesses, their shareholders & employees.

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By AnonymousUser
22nd Jun 2005 16:32

Big 4 [***] up, small firms suffer!
You say that the Big 4 have to work very hard to restore and retain public trust, but it is actually the small firms that suffer every time.

It is inconceivable that my firm could ever have an Enron type situation, yet we have had Practice Assurance forced upon us (supposedly, ICAEW members voted for it , but only a minority of members did. Most small practitioners were probably too busy trying to cope with the burden of regulation from Government departments and their Institutes!). More paperwork, less time to deal with things that matter to clients!

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By AnonymousUser
23rd Jun 2005 11:24

Try AIA graduates then
Try hiring AIA members then. If it is true that not many AIA graduates are found in Big 4?

So, give AIA members a try and see their performance. Maybe, they 'could do better' like what Sir John Bourn says in the header of this thread.


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By AnonymousUser
01st Aug 2005 03:40

Why Matthew not posting in this thread?
I know why - Matthew said he is not AIA member, so he must be member of those who 'affected', is this true Matthew?

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