British auditing report proves Irish got reforms right before Enron

Government does not need to revisit Review Group on Auditing's proposals from 2000 but should press ahead with implementing them, writes Brian Walsh

This autumn the Government will publish the Companies (Audit and Accountancy) Bill. A draft of the Bill has already been published and it will implement many of the 80 recommendations made by the Review Group on Auditing (RGA) in July 2000 on regulation of the accountancy profession, corporate governance and issues related to the independence of auditors.

The question has been asked recently whether, in the light of the crisis in confidence in corporate America, the review group's recommendations need re-visiting. A recent British government report would suggest that, far from re-running the Review Group on Auditing, the government should press ahead with implementing its recommendations.

The Co-ordinating Group on Audit and Accounting was established in February 2002 by the British Chancellor of the Exchequer and the Secretary of State for Trade and Industry to review the UK's current regulatory arrangements for statutory audit and financial reporting in the light of the collapse of Enron and other US corporate scandals.

The group was co-chaired by two ministers and included all the key regulatory bodies in Britain. Its interim report was published last month and many of its recommendations bear a striking similiarity to those made by the Irish review two years earlier. In fact, the structure and style of the British body's interim report is so close to that of the Review Group on Auditing, that one suspects the authors were heavily influenced by their Irish forerunners.

For example, the British group does not favour a blanket ban on auditors providing non-audit services to clients. It acknowledges that the perception of auditor independence can be adversely affected by the scale and scope of non-audit services provided by auditors. But it sets against that the economic benefit for the client of sourcing other services from its auditor either because of the latter's existing knowledge of the business or because the information required is a by-product of the audit process. The Co-ordinating Group on Audit and Accounting quotes an independent review of independence of Australian company auditors which also opposed a blanket ban.

Like the Review Group on Auditing, the British group believes that greater disclosure of the nature and value of non-audit work is desirable. The interim report also mirrors the review group's views on the need for the role and responsibilities of audit committees to be set out more clearly, including the task of recommending the appointment of auditors to shareholders and having an input into the extent of non-audit services provided by the auditor.

However, unlike in Ireland, it has stopped short of recommending that these requirements be enshrined in legislation. The British group also decided, like the review group, that the case for mandatory rotation of auditors has not yet been made and has undertaken to examine the issue further.

The Companies (Audit and Accountancy) Bill will put the Irish Auditing and Accounting Supervisory Authority (IAASA) in place on a statutory footing. The authority will carry out a similar supervisory role to the UK Accountancy Foundation, which the British report describes as "in advance of practice in other countries".

It is interesting that the British group, in drawing on international trends, seems to lean closer to developments in Europe and Australia than the US when making its recommendations, citing the "significant differences between the UK and US systems".

The European Commission published a Recommendation on Auditor Independence in May 2002. The paper was the result of extensive debate and consultation across EU member-states over the past two years and was reviewed in the wake of the Enron collapse. In the areas of auditor independence risk assessment, more disclosure of fees and greater involvement of audit committees, the Commission's conclusions were fully in line with the Irish accountancy profession's existing rules and guidance and with the recommendations of the Review Group on Auditing. The Commission did not favour mandatory rotation of auditors, favouring instead internal rotation of key audit partners.

The 17-member review group, which was chaired by Senator Joe O'Toole, worked intensively over a five-month period and produced a 300-page report with 80 recommendations. Its report is a very fine example of public policy development. It analysed the central issues, set out the key factors to be considered, examined the international context and, overall, made fair and balanced recommendations.

A central theme of the report was that Ireland should be at the forefront of international best practice, while at the same time maintaining our competitive position as a small open economy. The UK interim report supports the robustness and foresight of the review group and confirms Ireland's position as a leader in this field.

• Brian Walsh is chief executive of the Institute of Chartered Accountants in Ireland