Independence days

Financial Management (UK), Sept, 2000 by Katherine Bagshaw

Well-publicised scandals have brought the issue of audit integrity to the fore but, warns Katherine Bagshaw, UK accountants will lose variety, money and status if the profession has to conform to US or European norms

There are many reasons why the accountancy profession in the UK must ensure that its voice is heard internationally. Among them is the often overlooked fact that accountants have never operated in quite the same way in the US, Europe and the UK. Their training, their work, the amount they earn and their professional reputation differ enormously across the world -- and those in the UK will lose out if the US or European models gain precedence.

UK accountants are held in greater esteem by society, perform a wider variety of work and, by and large, are better paid than their colleagues in the US and Europe. These differences help to explain why issues such as independence are a real problem at the moment, particularly in the US.

Like it or not, the US profession has a direct impact on the profession in the UK. Companies keen to access the largest pool of capital in the world need a US listing and this means that their auditors have to obey the Securities and Exchange Commission (SEC) rules. A series of scandals have shaken public confidence in auditors' ability and desire to highlight corruption in the bigger US corporations and the SEC wants auditors to be, and be seen to be, independent.

For years the Big Five have watched their consulting arms rake in far more money than their audit practices and this makes it impossible for them to talk convincingly about the Chinese walls. Most of those who have not already sold their consultancy divisions are now in the process of selling them, or are planning to float them.

The SEC is also considering attempts by a number of firms to launch multi-disciplinary practices -- there is no obvious reason why it should view auditors and lawyers working together any more favourably than auditors and consultants working together. The issue is complicated by emerging evidence that a substantial number of Big Five employees in the US have invested in client companies, and a UK partner at PricewaterhouseCoopers was forced to resign a few months ago because his sister married the CFO at Reuters, a PwC client.

The SEC is determined to do something about the public loss of confidence in audit. The Independence Standards Board (ISB), which was set up three years ago by the SEC and the American Institute of Certified Public Accountants (AICPA), has issued detailed guidance on family relationships, employment with audit clients and a whole host of other independence-related matters.

All of these developments directly affect the way in which practices are managed in the UK. The larger firms, in particular, have been keeping a close eye on developments in the US -- the Chartered Accountants Joint Ethics Committee (CAJEC) is revising its Guide to Professional Ethics and the ICAEW has set up a working party to review auditor independence.

And developments in Europe are also having a wide-ranging impact -- after all, the bulk of current UK company legislation is derived from EU company law directives. The UK has influenced the development of these directives -- the idea of "truth and fairness", for example, is embodied in the fourth directive as a result of UK pressure -- but the requirement for a statutory format for accounts, the distinction between private and public companies and many others stem from French and German law.

As yet, the directives say little about independence mainly because different countries have different requirements, but the pressure for guidance is mounting. Over the past five years, the commission, with the help of the Federation des Experts Compatables Europeens (FEE), has tried to develop guidance on both the independence of auditors and the ownership of audit firms in an attempt to open up the single market and stave off US consolidators such as Amex, but it has had little success.

The only way to reconcile the different requirements is to use the lowest common denominator and, predictably, those countries with more stringent requirements object to this. Countries such as Germany regard the UK attitude to independence as hopelessly laissez-faire. But one thing is certain -- whatever is eventually decided in Brussels will ultimately be binding in the UK.

The different accountancy structures in Europe, the UK and the US go back a long way and are best understood in the historical context. Until recently, the UK was almost unique in requiring companies of all sizes to undergo an audit. This means that small and large accountancy practices have been offering accounts preparation and audit services to companies for a very long time.

The external audit requirement meant that the UK never needed an army of European-style tax auditors. Auditors remained essentially accountants with an auditing licence, and anyone could train as an accountant regardless of whether their academic background was in business, philosophy or botany.