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ACCA welcomes many of the recommendations of the House of Lords' Select Committee on
Economic Affairs' report ‘

 


.

ACCA is delighted that the Lords have recognised that audit adds value for businesses and their
stakeholders. ACCA agrees with points made in the report that the role of audit needs to be
strengthened and agrees with the recommendation that audit committees should hold discussions
with principal shareholders.

However, ACCA warns that the Lords' criticisms of IFRS and its effect on audit quality are
misguided and could have potentially serious implications internationally. Additionally, ACCA
believes that aspects of the recommendations require further clarification.

'We welcome the report and agree with many of its observations and recommendations,' says
Helen Brand, ACCA's chief executive, who gave evidence during the inquiry. 'We are
particularly pleased that on several occasions, ACCA's own recommendations and evidence have
been taken on board and specifically referenced by the report. We would agree that more
competition is needed in the audit market, but as a strong supporter of what audit can bring to
business we are glad that the investors and other participants in the inquiry acknowledged the
value and importance of audit in the economy.'

Brand adds: 'It is very pleasing to see that the Lords have recommended that the audit should
expand in scope to provide broader, more up-to-date assurance on matters such as risk
management, the business model, and the business review. ACCA also believes reform would do
much to reduce the "expectations gap" and meet stakeholders' needs.

'The Lords also refer to our call for action on audit liability, which our own global research has
shown is a deadweight on audit innovation. It is encouraging that the Lords have also heeded
calls to address the issue of restrictive covenants. We strongly support the suggestion that these
two issues - audit liability and restrictive covenants - be investigated by the Office of Fair
Trading (OFT). Action in these areas will do much to increase opportunities for competition in
the audit market.'

ACCA supports other observations made by the Lords. They have rightly rejected the idea of
compulsory rotation and joint audits, both of which have been floated by the European
Commission but which ACCA believes would actually do little to increase audit market
competition. Proposals for risk committees in banks and more regular dialogue between bank
auditors and regulators should also be supported.

However, there are certain recommendations and observations made by the Lords with which
ACCA cannot agree.
'We are most worried by the Lords' conclusion that the introduction of IFRS has led directly to a
reduction in audit quality,' explains Brand. 'ACCA does not believe this to be the case.

'The Lords have quoted many eminent participants in the inquiry process who have disagreed
with the Lords' assertion. ACCA does not believe the banking crisis was predominantly caused
by accounting issues and we are not convinced that IFRS provides less scope for auditors to
exercise prudent judgement, as is alleged.

'IFRS includes an overriding requirement that the financial statements should present fairly the
position and performance of a company. An audit has always been, and continues to be, more
than a report on compliance with a set of accounting standards. The Lords have overemphasised
the differences between UK GAAP and IFRS in this respect.'

Brand continues: 'It is important to note that the specific IFRS weakness identified by the Lords -
around expected rather than incurred loan losses - is already being remedied. The
recommendation that UK GAAP should be continued ignores the fact that the key accounting
standards in UK GAAP - on financial instruments - are virtually identical to existing IFRS. Any
shortcomings of the accounts and audits of banks should not be either a reason to deny global
standards to other companies or a justification of continuing to impose on other UK businesses
the extra costs of maintaining both systems.

'The criticisms made of IFRS are not helpful given that most countries have now committed
themselves to adopting IFRS as the preferred reporting framework for listed companies, and the
US is preparing to make its own decision as to the status of IFRS later this year.'

Regarding the Lords' conclusions on non-audit services, Brand says: 'We disagree with the
report's conclusions. While we accept that there is a strong case for auditors to be excluded from
internal audit work, we do not feel that tax advisory work should be included in any ban, and
certainly not for smaller entities. Most companies will feel aggrieved at the prospect of having to
take on another firm of advisers to do tax work, something that seems costly and unnecessary.'

Concluding, Brand says: 'Lastly, the report calls for a reduction in the audit requirement for
smaller companies in order to "lower regulatory costs". The Department of Business, Innovation,
and Skills (BIS) has also recently suggested this, but both the Lords and BIS have failed to
recognise that there would be a downside to removing external checks on small companies'
finances. Audit must not be so lazily confused with red tape.'

- ends -

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1. ACCA (the Association of Chartered Certified Accountants) is the global body for
professional accountants. We aim to offer business-relevant, first-choice qualifications to
people of application, ability and ambition around the world who seek a rewarding career
in accountancy, finance and management.
 [. We support our 140,000 members and 404,000 students in 170 countries, helping them to
develop successful careers in accounting and business, with the skills required by
employers. We work through a network of over 80 offices and centres and more than
8,000 Approved Employers worldwide, who provide high standards of employee learning
and development. Through our public interest remit, we promote appropriate regulation
of accounting and conduct relevant research to ensure accountancy continues to grow in
reputation and influence.
3. Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity,
innovation, integrity and accountability. We believe that accountants bring value to
economies in all stages of development and seek to develop capacity in the profession
and encourage the adoption of global standards. Our values are aligned to the needs of
employers in all sectors and we ensure that through our qualifications, we prepare
accountants for business. We seek to open up the profession to people of all backgrounds
and remove artificial barriers, innovating our qualifications and delivery to meet the
diverse needs of trainee professionals and their employers.

For further information please contact:

Helen Thompson/Nick Cosgrove, ACCA Newsroom

+44 (0)[0 7059 5759 / 5989
+44 (0)77[5 498654 / +44 (0)7963 496144
helen.thompson@accaglobal.com
nick.cosgrove@accaglobal.com

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