Is review group on auditors too disparate?

This week the 17 members of the review group set up by the Tanaiste and Minister for Enterprise, Trade and Employment, Ms Harney, will meet to discuss the role of auditors. But will these members, with such disparate views, form a coherent group? And will they be able to come up with common proposals, or have to deal with those contentious minority reports?

The four accounting bodies are represented but their four voices will have to be very convincing to sway opposing views. While they have espoused a similar reaction to the Public Accounts Committee's (PAC) proposals on auditors, their emphases on some points differ.

Ms Harney, announcing the review team, said she was widening the terms of its reference to include an examination of self-regulation in the auditing profession. Auditors want to retain self-regulation, though they are very conscious of the need to restore public confidence following the Dail PAC inquiry into DIRT evasion; that report was highly critical of the auditors of AIB and ACC banks, PricewaterhouseCoopers and Ernst & Young, both of which failed to make any provisions for the substantial potential DIRT liability at those banks during the period being investigated.

The Institute of Chartered Accountants in Ireland's (ICAI) main recommendation to the review group is the establishment of a new independent body to oversee the existing regulatory regimes operated by the accountancy bodies, similar or affiliated to that which operates in the UK. The UK body is funded by the accountancy bodies but does not contain any accountants.

That would make a lot of sense. It should erase the suspicion that accountants have fallen down in self-regulation following the secret meetings held by the ICAI in connection with the beef tribunal. The PAC made 10 recommendations to be addressed by the review group. Four would involve fundamental changes. It asked if accountancy firms appointed to undertake an external audit should also provide other services. And it further asks if the provision of services such as tax and consultancy compromises the auditing function.

The accountants are in favour of retaining the status quo. The ICAI believes that a ban on auditors providing non-audit services would be a disincentive to multinational companies considering investment in Ireland and also harm smaller companies who use accountancy firms for delivery of a range of services. Indeed, the small auditing firms perform an important backbone service, and changes could pose difficulties for the smaller firms.

However, the ICAI did not address the following question: if the audit firm puts in an accounting system, how can it question that system? And the basic question remains: should accountants be placed in a position of self-review? However, despite the shortcomings of the existing system, the ICAI's view that "enterprises should be free to choose the supplier of non-audit services" is convincing.

Also, while the recommendation by accountants that audit and non-audit fees should be separately revealed is long overdue, it should also be welcomed.

The PAC recommendation to have joint auditors to financial institutions, one of which would be appointed by the Central Bank, has been turned down as costly "without any clearly identifiable benefit", says ICAI. While such a system is mandatory in Denmark, and is in practice in the UK, it would indeed lead to higher audit costs. That financial penalty would have to be weighed against the added protection for bank customers and shareholders under the PAC proposals.

Another recommendation by the PAC, and turned down by the ICAI, is the proposal that an auditor can serve only for a maximum of five years, and after that a new audit firm has to be appointed. The ICAI has a ceiling of seven years for an audit partner but that does not rule out a continuation of the audit by the same audit firm.

The PAC proposal would erase a cosy relationship developing between the auditor and the company. However, the use of tenders for audits by corporations does bring an element of competition. Perhaps companies themselves should have a rule putting the audit out for tender every five years.

The 17-member team, chaired by non-accountant, Senator Joe O'Toole, has a deadline to complete the review by June. It has plenty of fodder following the submission by the accountancy bodies and other interested parties, but whatever recommendations it makes should be clear and unambiguous.

Bill Murdoch can be contacted at: bmurdoch@irish-times.ie