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2011: Uncomfortable reforms ahead

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29th Dec 2011
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Professional regulation and reform has been one of the hot topics in 2011, reports Robert Lovell.

During the past year, the accountancy profession has faced a pincer attack. At the top end, Big Four auditors faced criticisms and calls for structural changes to break their monopoly from both the UK House of Lords and European internal markets commissioner Michel Barnier.

Their lordships warned that the Big Four “oligarchy” that had grown up around listed company audits created concerns about competition, choice, quality and conflict of interest. Their report set in train a process that eventually mutated into a Competition Commission probe into audit market concentration.

It's worth remembering that this investigation, which was announced in October 2011, was the UK's main regulatory response to the global financial crisis, which the Lords economic affairs committee felt was caused in part by failings within the audit system.

The European competition commissioner had come to the same conclusion. And while Barnier and his team weren't much faster than their UK counterparts, they did at least emerge with some concrete suggestions. If they do take hold, the European reforms will probably have a more profound effect on the Big Four than anything the Competiton Commission investigation comes up with. But the commission's chief executive John Fingleton bravely commented, “We believe that such an inquiry will also complement the EU's legislative process.”

When Europe's audit market reform proposals finally emerged after a series of leaks and delays, the key measures included:

  • Firms will not be allowed to offer non-auditing services if already providing auditing services
  • Listed companies must switch or rotate to another auditor after six years
  • Joint audits are not obligatory, but are 'encouraged'
  • Mandates can stretch to nine years if the audit is done jointly.

Make no mistake, the Barnier reforms are a serious challenge to the Big Four. But they are infinitely adaptable organisations, as we saw in the way they turned the US Sarbanes-Oxley Act introduced to clamp down on independence failures in the wake of the Enron scandal in 2002 into a fee earning opportunity. Three of the four ditched their consultancy wings, but within 10 years, their advisory services are as active as ever. The big firms also wield considerable political clout, as can be seen from the effectiveness of their lobbying to smooth off some of the rougher edges of the European reform package.

Like so much else in accountancy, audit reform at the top end will be a long, attritional process. Some doors may open to new opportunities for top 50 firms within Europe, but will not affect the great legions of small practitioners, who face serious threats of their own from regulatory reform.

Changes ahead for smaller firms

At the other end of the scale, proposals to simplify financial reporting for micro businesses could well spell doom for high street and regional accountants. The March proposals outlined simplified profit and loss account and balance sheet reporting for the smallest businesses in Europe. The UK government enthusiastically embraced the European proposals as part of its deregulation drive for small business

Vince Cable joined in when he confirmed that he also wanted to take advantage of increased audit thresholds that would take more small companies out of the audit regime.

As AccountingWEB contributor Steve Collings argued, these reforms were not popular with the majority of accountants whose own businesses would be adversely affected. 

But the profession has been here before. The European audit threshold criteria have been rising steadily in recent years and many small business clients have already been lifted out of the audit requirement. Many firms have already pulled out of the audit market and focused instead on providing extra and added-value services for clients.

The National Accountants Conference back in June was a Mecca for accountants who have adopted a more profit-focused approach based around providing added-value services. As we move into 2012 and the proposed small business accounting reforms take hold, it will become a situation of adapt or retire for many high street accountants.

This was a key message from Mark Lloydbottom and other practice development experts who warned about the ‘generational timebomb’ facing the profession as a generation of ‘Baby Boomer’ accountants near retirement age. Mark Lloydbottom warned that they  face increasingly straitened circumstances as they try to plan their exit from the profession.

Tax policy making

While AccountingWEB has given the coalition government some stick about the reporting and auditing reforms for small business, we have to acknowledge that it has brought a new clarity to tax policy making. Under the principles laid down by George Osborne when he became chancellor in 2010, the objectives for measures are clearly stated and put out for consultation, leading to draft clauses published well in advance of the Budget and Finance Bill in which they will ultimately be introduced.

The new approach is welcome for eliminating many of the ugly surprises we have seen in the past (IR35 springs to mind), but on the practical side, the sheer volume of information published for comment threatens to swamp tax practitioners, lecturers and commentators. For this reason, AccountingWEB has started work on a Consultation Tracker to keep members on top of the measures and draft laws that are likely to appear in the coming months.

The table is still a work in progress, as new initiatives continue to appear at the drop of a ministerial hat. As we noted in our review of small business initiatives in 2011, the ConDems have put a lot of major regulatory changes on the table during the past year, but some such as IR35 and the merger of income tax and NICs appear to be bogging down.

We will be watching carefully to see if the government maintains its momentum through 2012, but even if it does so, we will be looking forward to a year of debate, uncertainty and transition. Thanks to its more methodical approach to tax policy making, the most significant changes will not come on stream until 2013/14.

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