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Let's facilitate a deal on auditing while it's on the agenda

THE accountancy profession is fond of using Lord Justice Tope's assertion that "the auditor is a watchdog, not a bloodhound".

Whatever the characteristic of the animal, the European Commission has decided that audit in Europe is broken and has set out on a torturous road to fixing it.

As part of our EU presidency obligations, it now falls to Irish ministers and civil servants to lead the debate with their EU colleagues on the Commission's proposals with the aim of bringing it to a conclusion by the end of June.

The feeling among those familiar with the process is that the countries taking up the baton of the EU presidency after Ireland are unlikely to make this reform a priority.

In a properly functioning business environment, audit is good for business, good for jobs and, yes, even good for small and medium-sized enterprises.

We recognise that we don't live in a perfect world, and that parts of the model could be improved. But the Irish presidency starts with a flawed set of proposals built on flawed judgment rather than business reality and has a real challenge ahead.

At the risk of flogging the canine analogy, the Commission's approach reminds me of when I had a dog that bit a child. We were then left with a choice of euthanasia or neutering followed by retraining.

The EU has a very similar dilemma. The problem is they are using the neutering as a punishment rather than to calm and are attempting to retrain the dog when in fact the retraining should be for the owner.

To address the deficiencies they believe exist, the Commission is proposing a number of solutions. It wants to place a cap on the length of time that an audit firm could act for the same client.

Some contend that being the auditor for too long makes the auditor complacent and the audit ineffectual; others argue that the longer that the auditor is in position the better they are at doing the audit.

Maximum terms of six, nine or 25 years have been mentioned. ACCA thinks that the audit committee has the knowledge to balance these factors in the context of a particular company and should decide the length of service without arbitrary limits.

The mandarins in Brussels also want to place restrictions on the additional services auditors could provide to their clients with a list of "banned" services that an auditor cannot provide and then a list of services that an auditor might, with special permission, provide.

The theory here is that, for example, an auditor should not audit a tax scheme which another partner in the audit firm designed. ACCA supports this concept, but we would note that these restrictions already exist in ethical standards.

If the Commission has its way, larger audit firms would be banned from doing anything other than audit. This would see the big four being forced to split into an audit and a non-audit firm. ACCA does not support this proposal and it seems that it is a proposal that is unlikely to proceed. There is no evidence that audit-only firms do better audits than firms that offer both audit and consultancy services.

One of the Commission's more enlightened proposals is to seek greater involvement of the audit committee in the client firm.

The audit committee would be charged with more responsibility to report directly to shareholders and to assist in the appointment of the auditors. This is something ACCA strongly supports and is happening in well governed companies already.

In keeping with its support for a single market and greater trans-European competition for goods and services, Brussels would like to see cross EU border audit firms emerging with the business being more internationally mobile.

In reality, this seems unlikely to be practical due to the ownership structure of the bigger audit franchise firms and other barriers such as different company law in different jurisdictions.

New proposals from audit standard setters would change the role of the auditor from watchdog to more of a watchdog / bloodhound cross. For example, one proposal would ask auditors to extend their work to the content of the Directors report – currently auditors merely say whether the report is "consistent" with the financial statements, they make no comment on whether the report is balanced or fair.

Another proposal would see the auditor report more explicitly whether the company will continue as a going concern. ACCA supports all of these initiatives.

In many of the recent audit failures, there have been deficiencies in the operation of the audit committee and directors.

Whatever breed of dog may finally best describe auditors, ACCA would like the auditors to be left "whole" and encourage that the directors and audit committees are fully trained up and competent to discharge their side of the audit function. And where there is an audit failure, those responsible should never be let near an audit again.

The Irish Government has a good track record on achieving compromise and getting things done in the EU during our presidency. Getting sensible audit proposals across the line would be a success for the Government. Unfortunately it looks as if this has fallen off the priority list.

Irish Independent