Tag Archive | "audits"

Vince Cable to exempt many SMEs from audit filing


Last Friday, Vince Cable announced that the audit system is to be overhauled; a move that could save SMEs and accountants for contractors £440 million each year.

The reforms will make it easier for new and expanding businesses to negotiate the auditing system, giving them more scope to concentrate on growth and expansion. The EU has less stringent auditing requirements and Cable’s reforms will bring the UK’s SMEs more into line with their European counterparts.

Furthermore, micro businesses and limited company contractors will only need to produce one simplified set of accounts. This amendment could benefit two million companies and save around £400 million annually.

After the announcement, Cable said small firms have to be allowed to grow and the audit reforms will ensure that small businesses can concentrate on growth and hiring, rather than paperwork.

Reaction from the major accountancy bodies was mixed. The assistant director of business policy at the ICAS, Paul Probin, said it was not in the public interest to remove the audit requirement from medium sized businesses.

The ACCA’s head of technical pointed out that the proposals were still at the consultation stage but clearly a lot of firms will be conducting fewer audits and he said he was disappointed that accounting and auditing rules had been labelled as red tape.

The ICAEW, on the other hand, broadly supports measures that ease the regulatory burden on small businesses. The audit threshold is currently £6.5 million turnover and he believes that if it is raised larger companies will carry on having audits voluntarily.

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There needs to be more competition in the audit market place


The Big Four audit firms have made it virtually impossible for smaller firms to have a fair chance, according to BDO.

The mid-tier firm made the statement in its written evidence to the House of Lords economic affairs committee tasked to investigate the lack of competition in the audit industry. The submission said that both domestic and international investors want to see more competition. Companies also want more choice but potential entrants have difficulties raising enough money to enter the market.

BDO also said that although there is no evidence to suggest that the dominance had affected quality, there is evidence that it has caused an increase in prices.

James Roberts, a partner at BDO, suggests that increasing audit exemption levels would benefit many UK companies.

BDO has joined forces with three other mid-tier firms; Grant Thornton International, Mazars and RSM International to call for changes in auditing procedures in order to prevent another global economic crisis.

The gang of four issued a joint statement swiping the dominance of the Big Four and saying that we must all learn from the economic downturn and accept that “no change” is no longer an option. They also call for the creation of an EU single market for auditing which will have common international standards.

Michel Barnier, the EU internal markets commissioner, pointed out that the reputation of the audit profession had been damaged by the financial crisis and there is a need to encourage more competitiveness within the market. He suggested placing ceilings on the larger audit firms’ total market share of limited companies and joint auditing, whereby two different firms conducted the audit, one of which was not a Big Four firm, as possible solutions.

The Financial Reporting Council’s chief executive, Stephen Haddrill, was not in favour of the joint audit proposal. Instead, he would prefer to see financial institutions using non-Big Four firms when they need advice for their risk committees. He also warned that a audit regulators need to develop a contingency plan in case one of the Big Four collapsed.

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Auditors in the dog house


Accountants will know that dogs generally bark at the least sign of danger but now Lord Lawson is suggesting that accountants should bark also! He has said that auditors were amongst the dogs that didn’t bark throughout the recent banking crisis.

A House of Lords enquiry, which has been looking into the audit profession, has found that accounting rules had a significant role to play in the crisis. Tim Bush, who is a member of the ASB Urgent Issues Task Force, pointed out that international accounting standards have forced auditors to stop being prudent when they carry out audits.

Bush said that accounting rules on contingent liabilities, impairment and securitisation were key factors in the collapse of the UK banks. He also suggested that we should reinstate UK GAAP.

Meanwhile, the Accountancy and Actuarial Discipline Board appears to have more on its plate than it can handle. The watchdog for the audit profession currently has 17 active cases to work through.

At the beginning of the week the AADB announced a new investigation into KPMG’s audit of BAE systems. The board has launched some high profile investigations since the crisis began including PwC’s JP Morgan Securities audit and an audit of Lehman Brothers by Ernst and Young.

The AADB team only consists of 5 members, two forensic accountants and three lawyers, and the heavy workload has meant they have to outsource a large proportion of the work, which slows down investigations. It is expected that further cases will be announced in the coming months.

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Audit Commission to go, but is that a sensible move?


The Audit Commission is to be scrapped, Eric Pickles, the communities minister, announced last Friday.

The commission employs about 2,000 people to monitor the performance and accounts of public sector bodies. The government claims that shutting it down will save around £50m a year.

This move is likely to benefit the private sector as councils and other public sector bodies will be able to tap into the open market and appoint their own external auditors. By outsourcing audit expertise, the government hopes to cut back on the centrally imposed bureaucracy and costly auditing, thus saving money for council tax payers.

The National Audit Office is to set up a new auditing framework to ensure public sector bodies are still subjected to robust auditing.

Pickles said that the Audit Commission is no longer a watchdog looking after the interests of the taxpayer; rather it has become a creature of Whitehall. This new plan goes together with proposals to create an army of local people who will hold local bodies to account when it comes to spending tax and delivering value for money services.

The Audit Commission, probably understandably, is less than optimistic that this new approach will work. Michael O’Higgins, the Commission’s chairman said the department had more than fulfilled its aims since it was set up by Michael Heseltine and the Tory government in 1983.

The ACCA believes the move will prove costly and lead to inconsistencies in local government reporting. The head of public sector at the ACCA, Gillian Fawcett, pointed out that although a lot of the Audit Commission’s work is currently contracted out; the commission ensures that reporting is consistent.

Whilst this move will undoubtedly benefit some private sector accountants and contractor accountants, the general feeling on the street is that the work will go to the larger accounting firms rather than smaller local businesses.

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Will regulation changes affect online accountants?


Contractor accountants might be interested to hear that the government is planning to merge the Financial Reporting Council and the Financial Services Authority to form a companies commission like the Securities and Exchange Commission in the United States.

On Monday the Treasury published the proposal which forms part of their plan to reform UK financial regulation. The paper entitled ‘A new approach to financial regulation’ said that the government believes there is a strong case for merging the two bodies to create a new regulator with responsibility for the stewardship of primary market activity, audit, company reporting and corporate governance. The new regulator would become the responsibility of Vince Cable, the business secretary.

The document points out that currently there is no one institution that has the authority, responsibility or powers to monitor the entire system and respond to potentially destabilising trends. This failing became obvious during the recent financial crisis. The regulators didn’t fully identify the underlying problems that caused the credit crunch and once the first signs of trouble became apparent they were unable to cope.

At present, the FSA’s remit is to monitor and regulate global investment banks and small local financial advisers. The Bank of England is responsible for financial stability, although it has no tools to enforce it, and the Treasury is tasked with maintaining the legal and institutional framework.

The coalition plans to set up a Financial Policy Committee which will be housed in the Bank of England and will ensure the UK’s financial stability. The FPC will receive macro-prudential tools to enable it to deal with systemic risks to financial stability.

The government also proposes to set up a new consumer protection and markets authority which will look out for the interests of consumers and promote confidence in financial markets and services.

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Lax audits could lead to an increase in company fraud


Contractor accountants may be interested in the warning from the CEO of BDO Global, Jeremy Newman. He has cautioned that auditors may be cutting corners because of increased competition and cost pressures.

In his blog, Newman pointed out that extreme pressure to reduce costs could encourage auditors to cut corners and less stringent audits have the potential to lead to more fraud.

He says that whilst there has been a drop in demand for audit services, this should be offset by changing accounting standards, additional regulation and high quality audits.

Recruitment levels have fallen by more than the demand for audit services and the economic law of supply and demand should have led to a price increase and yet that has not happened and costs are decreasing.

The potential for an increase in company fraud should cause concern as research, also from BDO, reveals that the value of fraud in the first half of 2010 has risen to more than £1bn.

The head of BDO’s fraud services, Simon Bevan, said that during the recession there was a rise in the number of managers setting up companies within companies and diverting lucrative contracts to third parties. Insider dealing also rose.

Internal management originates 16% of reported fraud whilst another 17% is instigated by suppliers and third party customers. The finance and insurance sectors are the worst offenders with almost 50% of all fraud cases being committed by those 2 industries.

In the past year the average fraud has risen by almost £1m to £6m. Bevan said that fraud is now as prevalent as it has ever been and companies need to be even more vigilant during recessionary times.

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Contractor accountants facing more negligence claims


Last year, 13 professional negligence cases were filed against accountants in the High Court according to Reynolds Porter Chamberlain LLP, a city law firm. Only 4 claims were made over the previous 5 years and this massive increase is being blamed on the recession.

Lawyers also predict that this is just the start of a surge of compliance cases. Companies that failed during the recession could be tempted to sue the big accounting firms, and some well known contractor accountants, believing that they have deep pockets.

Jane Howard, a partner at Reynolds Porter Chamberlain, thinks it most likely that claims will centre on the over valuation of company assets or failure to spot fraud during a company audit. Tax accountants could also face accusations of giving bad advice or mis-selling schemes relating to deferring capital gains and income tax.

The Big 4 accounting firms have already had cases filed against them in other countries and several firms could face lawsuits relating to Bernard Madoff’s Ponzi scheme.

Auditors had appeared to come out of the financial crisis reasonably unscathed until Ernst & Young was catapulted into the spotlight for their role in the Lehman Brothers collapse. They were fiercely criticised in a 2,200 page report for failing to give professional advice to Lehman Brothers and could now face legal action in the US courts.

As the current law stands, it’s hard to be successful in the UK when it comes to suing accountants for negligence because there is a higher legal threshold for proving liability. Speculative threats generally fall by the wayside once they have been firmly rebutted.

In 2009 the law lords threw out a multimillion-pound negligence case against Moore Stephens, a City contractor accountant which had been accused of failing to uncover a £58 million fraud at a commodity trader it had been auditing between 1997 and 2001. Although this case was dismissed, it was a split decision by the judges and this has led to less clarity about auditor’s fraud liability.

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