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The UK regime for financial reporting and auditing was radically altered in 1990 and 1991 by two separate developments. When removing sole responsibility for setting…
The UK regime for financial reporting and auditing was radically altered in 1990 and 1991 by two separate developments. When removing sole responsibility for setting accounting standards from the accounting profession, the opportunity was taken to establish a monitoring body, the Financial Reporting Review Panel (FRRP), to oversee compliance with company law and accounting standards, and with powers to apply to the courts for rectification. In addition, a new regulatory system for auditors was set up. This paper considers the problems arising between the regulatory responsibilities of the Institute of Chartered Accountants in England and Wales (ICAEW) and FRRP. In 50 cases (up to September 1999) FRRP found defects in accounts, 49 of which were audited by firms regulated by ICAEW, but no disciplinary action was taken by ICAEW until 1999. The way in which the new audit regulations were grafted onto the existing ICAEW disciplinary regime is considered, and the anomalies arising from that explored. The cases resulting in ICAEW's disciplinary action are compared with the other cases together with some evidence from finance directors and audit partners with experience of dealing both with FRRP and an ICAEW disciplinary investigation. The relevant theories relating to professional bodies and regulation are also reviewed. Finally, the authors review the problems identified in this study and make suggestions as to how they may be addressed.
While concentration measures are a good indicator of market structure, the link with competitivenessis more complex than often assumed. In particular, the modern theory of…
While concentration measures are a good indicator of market structure, the link with competitiveness is more complex than often assumed. In particular, the modern theory of industrial organisation makes no clear statement regarding the impact of concentration on competition ‐ the focus of this paper is concentration and no inferences are made about competitive aspects of the market. The extent and nature of concentration within the UK listed company audit market as at April, 2002 and, pro forma, after the collapse of Andersen is documented and analysed in detail (by firm, market segment and industry sector). The largest four firms held 90 per cent of the market (based on audit fees) in 2002, rising to 96 per cent with the demise of Andersen. A single firm, Pricewaterhouse‐Coopers, held 70 per cent or more of the share of six out of 38 industry sectors, with a share of 50 per cent up to 70 per cent in a further seven sectors. The provision of non‐audit services (NAS) by incumbent auditors is also considered. As at April 2002, the average ratio of non‐audit fees (paid to auditor) to audit fees was 208 per cent, and exceeded 300 per cent in seven sectors. It is likely, however, that disposals by firms of their management consultancy and outsource firms, combined with the impact of the Smith Report on audit committees will serve to reduce these ratios. Another finding is that audit firms with expertise in a particular sector appeared to earn significantly higher nonaudit fees from their audit clients in that sector. The paper thus provides a solid empirical basis for debate. The subsequent discussion considers the implications for companies and audit firms of the high level of concentration in the current regulatory climate, where no direct regulatory intervention is planned.
A new regime for registering and monitoring auditors has come into force in Great Britain. The power to make rules for audit practice, qualification and registration has…
A new regime for registering and monitoring auditors has come into force in Great Britain. The power to make rules for audit practice, qualification and registration has been delegated to the professional accountancy bodies. Two significantly different systems have come into being, the one operated by the Institutes of Chartered Accountants and the other by the Chartered Association of Certified Accountants. The audit register contains a mixture of information derived from different registration practices. There is evidence that the new regime has significantly increased the cost of auditing small limited companies at a time when the usefulness of such audits is widely questioned, even by auditors themselves. The effects of the new regime on the audit of large companies, about which there has been public concern following recent company collapses, appear limited.
On 16th April, 2002, the authors gave oral evidence to the House of Commons Treasury Committee Inquiry into Financial Regulation of Public Limited Companies which was set…
On 16th April, 2002, the authors gave oral evidence to the House of Commons Treasury Committee Inquiry into Financial Regulation of Public Limited Companies which was set up following the collapse of Enron. This paper is adapted from the written submission to the Committee on which their oral evidence was based. The authors argue that the Enron collapse provides an opportunity for regulators to stand back and consider fundamental issues associated with the regulatory framework for financial reporting, auditing and corporate governance in the UK. They challenge the financial reporting framework as being muddled between the concepts of stewardship and decision usefulness. Company balance sheets are an amalgam of figures based on historical cost and accounting estimates. The increasing use of financial instruments and the inclusion of intangibles makes valuations complex and judgmental and therefore much more dfficult to audit. Incentives in the capital markets which drive the behaviour of all participants should be considered to ensure that the current system does not encourage dysfunctional outcomes and excessive rewards. The personal incentives for partners in audit firms are of particular interest as a potential key influence on auditor independence. It is suggested that non‐executive directors should be mandated to protect the interests of investors. The authors counsel against kneejerk reactions to the Enron collapse as a number of changes such as the transfer of regulation of securities listing to the Financial Services Authority (FSA) and the establishment of the Accountancy Foundation need time to settle down. They believe that auditor rotation will introduce costs without clearly identifiable benefits and are opposed to wholesale banning of auditors providing non‐audit services to their clients.
The Department of Trade and Industry (DTI) issued a consultation document in November 1998, which set out a framework for the independent regulation of the accountancy…
The Department of Trade and Industry (DTI) issued a consultation document in November 1998, which set out a framework for the independent regulation of the accountancy profession. This framework broadly adopts the proposals put forward by the profession itself. In this paper, the focus is on audit regulation. The current regime is outlined and its structural weaknesses and procedural problems identified. The proposed reforms are described and critically evaluated. It is argued that the proposed reforms offer only a partial solution to regulatory concerns, since no changes are proposed to the existing regime either for registration, or for monitoring and discipline of the majority of audit cases. An expanded framework that rationalises current practices and provides a more comprehensive solution is suggested. A critical feature of the proposal is that a distinction is made between audits of small entities and audits of major listed companies, only the latter of which are of public interest. Each would have distinct licensing and monitoring procedures.
As part of a deregulation initiative for small businesses, the audit exemption limit was raised to £1m by the Audit Exemption (Amendment) Regulations 2000 in May 2000…
As part of a deregulation initiative for small businesses, the audit exemption limit was raised to £1m by the Audit Exemption (Amendment) Regulations 2000 in May 2000. This paper examines the possible consequences of this change on the supply of registered auditors' services and the subsequent impact this may have on a range of business entities, other than small private companies, which use registered auditors for various purposes.
The audit function is an essential part of the regulatory structure which supports the integrity of our capital markets. There is a recognised expectations gap which…
The audit function is an essential part of the regulatory structure which supports the integrity of our capital markets. There is a recognised expectations gap which surrounds the audit function, as many users of audited financial statements have different expectations of the audit function from what it delivers. Perceptions of auditor independence are a fundamental part of this expectations gap. In the light of recent significant changes to the regulatory framework, this paper reports a survey of leading financial journalists, to ascertain their current views on auditor independence. Findings show a belief that some of the changes have reduced the expectations gap although problems still exist in the area of non‐audit services. However, the most significant threat to independence is seen to be the economic and personal pressure on the partner as an individual, an area difficult to regulate. The challenge for audit firms is to demonstrate how well they control for this within their management structures.
Competitive pressures in the audit market have led to aggressive fee renegotiation and tendering by companies. This paper reviews microeconomic tender theory and finds it…
Competitive pressures in the audit market have led to aggressive fee renegotiation and tendering by companies. This paper reviews microeconomic tender theory and finds it to be of limited value in the audit context. Content analysis of semi‐structured interviews conducted with the finance directors of 12 UK listed companies which had recently tendered and/or changed auditor are used to investigate the tender/change process. Contrary to popular belief, fee levels do not necessarily dominate the decision to change auditors, rather changes within the client company, audit staffing, and auditor’s professionalism and competency issues dominate. Nor is the selection of a tender “winner” generally based solely on price, as predicted by tender theory and as would be expected when the consequences of audit failure do not fall on the directors. However, consistent with economic theory, the winning bid appears frequently to be too low, resulting in attempts by auditors to subsequently increase fees and resentment by the finance director. Directors generally appear to view the audit tender as relating to not only the attest function per se, but to a larger package of services concerning the financial reporting function. The relative importance of price versus non‐price competition in auditor choice is found to vary across companies. Auditor choice is influenced strongly by both economic and behavioural factors, in particular, by directors’ assessment of the quality of non‐attest services and the expected quality of working relationships, in addition to price and audit quality.
The Financial Reporting Review Panel (FRRP) was an innovation in the UK as it was responsible for the previously little considered issue of ensuring compliance with…
The Financial Reporting Review Panel (FRRP) was an innovation in the UK as it was responsible for the previously little considered issue of ensuring compliance with financial reporting regulations. This paper draws on institutional theory to compare the stated aims, objectives and operating procedures of the FRRP with the practical experiences of those who have had discussions with them, and evidence of the wider impact of their work. The aim is to provide a richer understanding of the way in which this relatively new institution achieves its objectives, and to determine whether it has engaged in “myth making” in order to establish and maintain its legitimacy. The original objectives of the FRRP are explored in this paper, as well as subsequent public pronouncements on its aims, procedures, and achievements. Discussions with key members of the FRRP have enabled further clarification of some of the issues. The perceptions of those with experience of dealing with the FRRP were gained by a series of semi‐structured interviews. Interviews were carried out with company directors and audit firm partners who had direct experience of the FRRP. The analysis draws out themes related to the investigation process and final outcomes of this process. The paper concludes that there is some evidence that the FRRP has engaged in “myth building”. For example, it was considered that cases the FRRP chose to pursue tended to involve rather less serious issues than their public statements might suggest. Also they have considerable operational discretion and this appears to be exercised in a rather unpredictable way without explanation. Overall, however, the evidence suggests that the FRRP is an effective regulator.
The paper aims to trace the development of attitudes towards financial reporting solutions for entities not subject to the European Union (EU) Regulation. This Regulation…
The paper aims to trace the development of attitudes towards financial reporting solutions for entities not subject to the European Union (EU) Regulation. This Regulation mandated application of IFRS for the group accounts of listed companies for financial years beginning 1 January 2005. It seeks to evaluate the alternatives in the light of changing attitudes to IFRS, and the accounting model being adopted, particularly focusing on the problems facing smaller companies.
The paper employs qualitative analysis of data from two main sources: first, a series of interviews with financially literate individuals before IFRS was implemented in the UK; and second, from responses to ASB's consultations on the future of financial reporting for non‐listed entities.
The increasing perception is that IFRS is overly complex and is complicating the search for appropriate form of financial reporting for entities not covered by the EU Regulation. In particular, there is a difficulty in knowing the correct dividing point between large and small company accounting, and views on this have evolved over time. The needs of small and medium enterprises appear to have been ignored in the debates dominated by the requirements of global players.
The implications are that further, possibly more radical policy options need to be considered for smaller companies to ensure that the costs of financial reporting remain in proportion to the benefits.
The paper identifies the changing views in the UK of the suitability of IFRS for non‐listed entities.