Independence in the spotlight

WHILE support industries such as accountancy, stockbroking and law may seek to provide more personalised and informed services for their clients, questions are being raised about the integrity of these support firms and their ability to provide independent advice while also being supportive of clients.

The close association that company clients are looking for is drawing criticism from the public and the corporate watchdog.

Stockbrokers were the focus of a recent study by the Securities Institute which, among other things, called for greater use of ‘Chinese walls’ between the brokers’ corporate and advisory services.

Now the attention has shifted to the workings of accountancy firms and their ability to provide independent audit services.

Motivated in part by recent high-profile corporate collapses, such as HIH, Harris Scarfe and international energy trading giant Enron, the Australian Securities and Investments Commission last week released company responses concerning the relationships with their auditor and accountancy firm.

Companies’ responses highlighted just how close the relationship between the company and their audit firm is.

Ninety per cent of the companies said they used the audit firm for other services, with audit work comprising around 50 per cent of work given to the audit firm.

ASIC chairman David Knott said there appeared to be a lack of concern to manage conflicts of interests by both companies and auditors.

“The high level of fees earned by audit firms through non-audit services reinforces the potential for conflicts of interest,” Mr Knott said.

But he indicated that ASIC would not be doing anything to address

the concerns until the Federal Government responded to Ian Ramsay’s auditing standards inquiry.

That report raised a number of concerns, including the need for a mandatory two-year waiting period before a retired audit partner involved in the auditing of a client can become a director of that client.

Overseas, the US Securities and Exchange Commission is reportedly considering a plan for a self-policing authority to punish accountants who fail to meet professional standards, while the American Institute of Certified Public Accountants has proposed new auditing standards.

Two peak Australian accounting bodies, the Institute of Chartered Accountants in Australia and CPA Australia have strengthened some of the key guidelines further.

Their measures include instituting a two-year mandatory waiting period before a former auditor becomes a director of a former client and ensuring that fees from a single client do not exceed 15 per cent of total fees to avoid the “perception” of self interest marring audit independence.

The Australian Shareholders Association signalled its concerns about auditors and, in particular, their independence last year. It wants:

p auditors banned from undertaking other services for their clients;

p companies to state whether tenders have been called for non-audit work and the nature of this work, particularly where the amount paid for the work is greater than 50 per cent of the fee paid for audit work;

p auditors to report to shareholders on a basis that is patently independent; and

p former audit firm partners to not be appointed as directors of companies being audited by their former firm.

CPA Australia WA director Justin Walawski said most auditors were doing a good job.

“All registered auditors are required to be independent and in a position where there is no perceived conflict of interest,” he said.

“Some auditors would argue that providing other accounting work to a client does not breach that standard, but I can see that it could be perceived to be a conflict of interest and does need to be addressed.

“The Real Estate Business Advisory Board has brought about a change to its Act to ensure the auditor of a real estate business is not supplying significant accounting work to that business.

“The CPAs supported the REBA move, providing it addresses each case on its merits.”

Institute of Chartered Accountants in Australia national president Geoff Brayshaw believes people expect more from auditors than they could deliver.

He said organisations such as the Institute, which considered itself a self-regulator of its profession, had to carry the can when auditors got into trouble.

“We have to be seen to take action against individuals if it is warranted, but those individuals must be given every opportunity to take part in the process,” Mr Brayshaw said.

Auditors acting as consultants to firms they were auditing was not a concern for the institute, he said.

“But it is something that needs to be looked at,” Mr Brayshaw said.

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