The Financial Reporting Council has today published a discussion paper on the possible effects of changes to audit firm ownership rules, and a consultation on the use of audit firms from more than one network.
The discussion paper and consultation form part of the FRC’s latest progress report on the recommendations of the Market Participants’ Group (MPG) on actions to enhance the efficiency of the market for audit services to large companies in the UK.
The discussion paper considers a number of issues in relation to audit ownership, including:
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Ease of entry and the potential for mid-sized firms to gain market share
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The potential impact of the introduction of outside capital to audit firms on audit quality
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The impact of the introduction of outside capital on the supply of auditors with appropriate skills and personal qualities
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Possible decline in audit quality arising from conflicts of interest associated with a firm’s ownership.
The consultation sets out draft guidance on the circumstances that could influence a group’s decision to use one or more than one audit network and lists some factors that company audit committees might consider in assessing the group’s audit arrangements.
Responses to both the discussion paper and the consultation are sought by 1 August, 2008.
The progress report on the MPG’s 15 recommendations describes the work carried out in the past six months together with international developments that could contribute to the objectives of the recommendations.
Key developments since the MPG’s report was published include:
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A working group chaired by Norman Murray, Chairman of Cairn Energy plc, has been established by the ICAEW to develop a code of best practice governance for accounting firms that audit public interest entities.
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Proposed changes to the Guidance for Audit Committees (formerly known as the Smith Guidance) have been published for consultation by the FRC, including new guidance that audit committees should explain to shareholders how they reached their recommendation on the appointment, reappointment and removal of the external auditors, including any contractual obligations to appoint certain types of firms.
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New audit regulations and guidance have been introduced to allow access by an incoming auditor to relevant information held by the outgoing auditor.
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Revised corporate governance policy and voting guidelines covering auditor selection by investee companies have been issued by the National Association of Pension Funds.
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A working group of representatives of audit firms has been formed by the Consultative Committee of Accountancy Bodies to develop guidance on the voluntary disclosure of the financial results of work on statutory audits.
FRC Chief Executive Paul Boyle said:
“A good start has been made on the implementation of the recommendations of the Market Participants Group in the UK and there are also promising developments in Europe and the United States. We look forward to receiving comments on the issues relating to possible changes to audit firm ownership rules and the use of audit firms from more than one network.”
