Memorandum submitted by Mrs Stella Fearnley,
Mr Richard Brandt, Portsmouth Business School and Professor Vivien
Beattie, University of Stirling
Effective financial regulation is a multifaceted
function. It is not just about law and regulations which cover
financial reporting, corporate governance and auditing. It is
also about the balance between ethics and the incentives which
drive all parties who are key players in our capital markets.
These parties include fund managers, analysts, investment banks,
company directors, auditors, regulators and financial journalists,
who all contribute in different ways to the effectiveness of the
In this paper we focus primarily on financial
reporting, corporate governance and audit, subjects in which we
have conducted extensive research, but we caution against any
review of financial regulation being limited to these areas.
In order to maintain confidence in our capital
markets, we need a framework which sets standards for high quality
accounting, high quality auditing and sound corporate governance.
To be effective, however, a framework also needs to encourage
a culture of compliance with the standards set and have enforcement
and oversight mechanisms in place which deter non-compliance and
deal swiftly and effectively with abuse. A further key attribute
of a regulatory framework is that it must be cost effective, ie
the costs of compliance must not exceed the overall benefits to
society from the regulations imposed.
There have been two periods of change to the
UK framework in the last decade. A series of changes were introduced
in 1991-92 emanating from UK based changes to company law, from
EU Directives and from financial scandals. In the last two years
we have seen significant changes which have arisen within the
UK that aim to strengthen financial regulation. We can also look
forward to further changes both arising from within the UK and
from EU requirements.
2. RECENT DEVELOPMENTS
2.1 Changes introduced in 1991-92
Significant changes were introduced to the UK
regulatory framework for financial reporting and auditing by the
1989 Companies Act. The establishment of the private sector regulator,
the Financial Reporting Council
and its subsidiary bodies, the Accounting Standards Board which
sets accounting standards, the Financial Reporting Review Panel
which investigates company accounts for non-compliance with accounting
standards and company law,
and the Urgent Issues Task Force, was in response to a recognised
need to improve the quality of financial reporting in the UK.
There was poor quality accounting (referred to by some as creative
accounting) in the 1980s, and enforcement was weak. This change
was led by the DTI which went through various consultation processes
with interested parties.
A new system for the regulation of auditors
was also introduced in 1991. This has its origins in the EU 8th
directive, one objective of which was to enable mutual recognition
of audit qualifications throughout the EU. Auditors must hold
a recognised qualification and be able to show relevant experience.
They must also be licensed and publicly registered. Additional
provisions which were not required by the 8th directive were introduced
in the UK. In order to retain their licences audit firms are subject
to regular monitoring of the quality of their work. Failure to
perform work to a sufficient standard can lead to fines and possible
removal of the licence for a firm or an individual. The system
is operated under delegated authority from the DTI by the UK accounting
bodies whose qualifications are recognised in law for statutory
A further significant non-statutory change was
set in train following major corporate collapses, particularly
the Polly Peck and Maxwell affairs. The quality of corporate governance
is recognised to have a major influence on the integrity of auditing
and financial reporting (particularly the influence of audit committees)
and a series of codes were developed which set out best practice.
From December 1998 the Stock Exchange made it a requirement of
the Listing Rules that companies should disclose the extent of
their compliance with what had become the Combined Code of the
Cadbury, Greenbury and Hampel Reports. From December 2000 directors
are also required to report to shareholders on their review of
the effectiveness of internal control and risk management.
2.2 Changes introduced 2000-2002
After a period of relative stability, two further
significant changes to the UK framework have very recently been
First, because of concerns both from members
and the public about the dual role of professional accounting
bodies as regulators and as members' service organisations, following
a period of negotiation with the DTI, the UK professional accountancy
combined to set up The Accountancy Foundation. The Accountancy
Foundation and its subsidiaries provide independent oversight
of regulatory activities and ethical standards of the accountancy
profession, set standards for auditing, and conduct investigations
into public interest cases where accountants are involved. A key
feature is that the membership of these bodies does not have a
majority of practising accountants. The Review Board will oversee
the regulatory responsibilities of the accounting bodies. The
existing Auditing Practices Board is being reformed. A new Ethics
Standards Board oversees the setting of ethics standards for all
the professional bodies; and an Investigation and Discipline Board
will replace the current Joint Disciplinary Scheme operated by
only two of the six bodies, the Institute of Chartered Accountants
in England and Wales and the Institute of Chartered Accountants
of Scotland. The Accountancy Foundation was set up in 2000. The
Review Board and Ethics Standards Board were set up in 2001 and
the establishment of the other two bodies is still to be finalised.
Given the newness of this structure, it is not yet possible for
any sensible assessment to be made of its impact on the UK professional
accountancy bodies' regulatory activities, the quality of standards
setting in audit and ethics or the investigation of the role of
accountants in corporate collapses.
Second, a major change took place in May 2000
when the regulatory activities of the London Stock Exchange were
transferred to the UK Listing Authority, part of the Financial
Services Authority. State responsibility for oversight of financial
reporting and auditing lies with the DTI. The responsibility of
the UK Listing Authority is to regulate the admission of securities
to listing, investigate market abuse and insider dealing and ensure
that registrants comply with the requirements of the UK Listing
Rules. Since 1 December 2001, the UK Listing Authority has acquired
additional powers to investigate and prosecute directors of companies
which are found to have breached the Listing Rules.
A review of the listing rules is currently being carried out.
Statements have been made by the chairman of the FSA and the Chief
Executive of the UK Listing Authority about the future possibility
of the UK Listing Rules containing provisions relating to audit
As these changes have also been very recently introduced no sensible
assessment of their impact can be made and it is not possible
to assess how the future role of the UK Listing Authority will
2.3 Future Developments
Two significant developments are planned for
the future. First, following a comprehensive review of UK Company
Law from first principles, and a lengthy consultation process,
a new Companies Bill is being prepared. Included in the suggested
provisions are a much clearer statement of directors' responsibilities,
which would facilitate action against directors who abuse their
position, and a mandatory Operating and Financial Review for larger
companies, which will encourage greater transparency in financial
Second, progress is well advanced within the
European Commission for the adoption of International Accounting
Standards by listed companies throughout the EU by 2005. The purpose
of this is to bring about common standards of financial reporting
throughout capital markets in the EU. This will also facilitate
cross border listings and transactions. The changeover to International
Accounting Standards for listed companies in the UK will require
considerable effort for the companies involved. It is as yet unclear
how this change will affect unlisted companies.
3. REVIEW OF
In this section we review the effectiveness
of the UK framework in the light of our own research findings.
Our comments mainly arise from our recently published book `Behind
closed doors: what company audit is really about', a copy
of which has been sent to the Select Committee, and other research
studies we have carried out. We divide our comments into those
relating to corporate governance, financial reporting, auditing
and motivation and personal incentives.
3.1 Corporate Governance
In "Behind closed doors" we
find, in our six case studies, different patterns of behaviour
among non-executive directors who are seen as key to the effectiveness
of the corporate governance framework. We find examples of non-executive
directors supporting best practice in internal control and financial
reporting. We also find examples of non-executive directors who
are in the pocket of the chairman, who are therefore not independent,
and examples of domineering and bullying chairmen, who intimidate
both their own staff and their auditor to try to show the company's
results the way they want. The pattern of behaviour is varied.
We have, however, been encouraged by other research
which indicates a belief among audit partners, finance directors
and financial journalists that an audit committee, composed of
non-executive directors, a majority of whom are independent,
strongly enhances auditor independence. The mere fact that a company
has non-executive directors on its board does not mean that they
are either independent or effective.
3.2 Financial Reporting
Our surveys of finance directors, audit partners
and financial journalists show a strong belief that the integrity
of the UK financial reporting process has been enhanced
by the new accounting standards set by the Accounting Standards
Board, by the enforcement activities of the Financial Reporting
Review Panel and the pronouncements of the Urgent Issues Task
There is also a belief that improved accounting standards have
to some extent enhanced auditor independence.
Our research also indicates that the Financial Reporting Review
Panel, which was an innovation in UK financial reporting, has
changed attitudes to accounting compliance in larger audit firms,
who act for the vast majority of listed companies. We also find
that the Review Panel has enhanced auditor independence because
of the costs and reputation risks for audit firms if their clients'
accounts are publicly criticised by the Review Panel.
In "Behind closed doors" we
find further support for the Review Panel as neither the auditors
nor the companies were prepared to lend their names to accounts
which showed visible evidence of non-compliance with law or accounting
standards. There can always be room for improvement in financial
reporting standards, but the UK framework has three particular
strengths. First, it is based on principles rather than detailed
rules, and it is more difficult to avoid compliance with a principle
than a specific rule. Second, UK company law provides for a true
and fair over-ride to be applied to accounts so that where
compliance with the framework does not lead to the accounts showing
a true and fair view, alternative accounting treatments should
be adopted but must be fully disclosed. These two strengths leave
limited scope in UK accounting for claims that materially misstated
accounting information complies with accounting rules. A third
strength is that UK accounting standards, the development of which
are subject to rigorous due process, have not up to now been subject
to political interference. It is essential that, to retain the
integrity of the system, powerful lobby groups and politicians
should not be able to influence accounting practices to suit their
There are issues in accounting which are subject
to judgmental decisions, such as stock valuations and bad debt
provisions to which precise numbers cannot be attached. Also some
accounting practices are now immensely complicated, particularly
relating to certain types of financial instrument. It is becoming
increasingly difficult, therefore, to attach values to assets
and liabilities related to financial instruments at a fixed date
and to quantify the associated risk. The large corporate entity's
balance sheet and a profit and loss account has become an amalgam
of fact and judgment, represented by numbers made up partly of
historical cost and partly of estimates and valuations. The present
day purpose of company accounts has also become a muddle between
the principles of stewardship (directors giving an account of
how they have managed the business) and decision usefulness (future
investment and cash flows). In our view the time has come for
all parties to stand back and consider for whom and for what purpose
company accounts are prepared in their present form.
The impact of regulation
Since the introduction of audit regulation in
1991, our research indicates that audit firms of all sizes believe
that the standard of their audit work has improved.
The large firms have found it easier to ensure all their partners
comply with their own internal standards and the regulatory framework,
and the smaller firms have been more thorough in their work.
There are also beliefs that the risk of loss of audit licence
either for a firm or an individual has enhanced auditor independence.
Independence and non-audit services
Our survey work indicates beliefs among audit
partners, finance directors and financial journalists that the
factors which most undermine auditor independence
are linked to the economic dependence on the client of the audit
firm and in particular the individual partner. The two
highest ranking factors which undermine independence for all three
groups are first, where the partner's income is dependent on the
retention of a client, and second, where the partner does not
wish to lose status by losing a key client. The other factor ranked
highly by audit partners and finance directors is where more than
10 per cent of a firm's revenues come from one client. (This level
of economic dependence is currently permitted in the UK.)
Interestingly, the financial journalists ranked
a high level of non-audit services as a more serious threat to
independence than did either the finance directors or the audit
We believe that this difference of views between
financial journalists and audit partners and finance directors
arises from the difference, which is not widely understood outside
the accounting profession, between independence in appearance
and independence in fact. Audit would have no value
to the regulatory framework which supports our capital markets
if auditors are not independent of management. Because the audit
process is not generally observable to those who rely on it, public
confidence in audit derives from beliefs that auditors are independent.
Much of the regulatory framework relating to
auditor independence is focussed on providing assurance about
the appearance of independence because the fact is unobservable.
The only circumstances where evidence of independence in fact
(or lack of it) emerges is from reports of the small number of
cases of corporate collapse and audit failure where there has
been gross negligence or misconduct, and where the findings are
made public either via DTI reports or by the findings of the Accountants'
Joint Disciplinary Scheme. It would be entirely inappropriate
to take these cases as representative of auditors as a whole.
In Behind closed doors, we find much
evidence of independence in fact and some evidence of lack of
it. What does emerge from Behind closed doors (and from
a subsequent study which deals specifically with the independence
is that the quality of a firm's internal management and the personal
integrity of the individual partners are vital influences on independence
in fact. In the cases where we find problems these arise from
a combination of circumstances: the weakness in the personal characteristics
of the individual audit partner; lack of clarity in the regulatory
framework; an inexperienced partner being allocated to an older
and difficult client; a bullying chairman; poor corporate governance;
and a disorganised firm. There is no single factor involved.
As referred to above there is a perception among
journalists (and others) that the provision of non-audit services
de facto undermines independence. Academics have studied this
subject for many years and no-one has yet succeeded in establishing
conclusively whether the provision of non-audit services undermines
independence or not. We have found no evidence from our case studies
in Behind closed doors of non-audit services undermining
independence in fact. What we do find, however, is concerns about
losing a clientnot concerns about the mix of fees associated
with that client. This supports our survey work that the most
significant factors which undermine auditor independence are loss
of income for an audit partner as a result of client loss, and
loss of personal status within the firm.
Regardless of the lack of evidence about non-audit
services undermining independence, the perception remains, and
it cannot be ignored if confidence in audit is to be maintained.
In our view, there are two fundamental issues to be addressed:
the first relates to the nature of non-audit services: the second
relates to the auditor independence framework itself.
First, the nature of what non-audit services
comprise needs to be better understood. Our survey work
indicates that non-audit services include compliance related work
which is economically and in some cases legally inseparable from
audit. Services which are closely related to financial reporting,
such as advice on implementation of new accounting standards and
other regulatory requirements, or the accounting treatment of
complex transactions, may not be part of the quoted audit fee,
but there would be no sense in other parties being involved. Other
services require the involvement of the company's auditor eg reports
on some class 1 circulars. There are other services, such as tax
advice, which are closely associated with financial reporting
which companies may prefer their auditors to do because of knowledge
spillovers. We find that once the services are not closely associated
with annual reporting, companies will seek the best supplier,
which may or may not be the auditor. Ignorance about the nature
of non-audit services can be easily resolved by more detailed
disclosure in company accounts, as is already done by some companies.
Second, the UK independence framework recognises
that the provision of non-audit services and undue dependence
on an audit client are a threat to independence. But in respect
of listed companies we believe the framework needs to be reviewed
to ensure strict observance of two fundamental principles: auditors
should not take management decisions; and they should not audit
their own firm's work.
We also suggest that the UK framework should be reviewed for undue
dependence on an audit client by the partner and the firm.
Introduction of auditor rotation has also been
discussed by some regulators and journalists. Our research indicates
that in the past this has not ranked as a high priority issue
with journalists and has little support from finance directors
and audit partners. We are not aware of evidence from the UK that
rotation would enhance independence. Our research on auditor changes
demonstrates that auditor change is a costly exercise both for
audit firms and companies.
We estimate the annualised rate of auditor change among listed
companies to be around 4 per cent.
There are approximately 2200 UK domestic companies registered
with the UK Listing Authority. The introduction of auditor rotation
on a five yearly cycle, which has been mooted by the Chairman
of the FSA (see note 6) would force 352 listed companies, which
would not otherwise have done so, to change their auditors each
year. Before such a high cost is imposed on companies and audit
firms the benefits would have to be clearly demonstrable.
Value Added Audits
Our research into audit changes indicates that
some company directors see little value in audit. We have labelled
these directors as grudgers.
These buyer types seek to purchase audit services at as low a
price as possible, and increasing competition in the market for
audit services has enabled such buyers to bring the price of audit
down. We have argued that the principal of caveat emptor
in relation to price does not apply in the case of the purchase
of audit services. This is because audit is a regulated activity
and standards must be met by the audit firm regardless of the
price of the service. The purchase of audit from a reputable firm
is a risk free activity for directors as it is the shareholders
and the audit firm who suffer in the event of a failure.
Behind Closed Doors, however, indicates
the importance of the primary relationship between the audit partner
and the finance director of a company, which influences the quality
of audit outcomes. We therefore see no obvious alternative to
directors playing a key role in the auditor selection process.
Nevertheless we believe two issues in respect of auditor choice
could be considered.
First, a culture change must be encouraged about
who obtains value from audit. Since competition within the market
for audit services has increased, directors have complained to
us that they receive no value from audit, and auditors, knowing
the directors are the effective purchasers, are offering audits
which they claim add value to the company and management. We suggest
that this is misdirected as the true value of audit to the company
and the directors is the signalling to investors and others users
that the accounts prepared by the directors have been audited
and show a true and fair view. The rest is irrelevant. We believe
it would be far better for audit to return to its roots rather
than purport to be a service to management.
Our second point follows on from the first.
If the culture change in thinking can be achieved then the price
of audit should be viewed not in terms of the value to the management
but in terms of the value to the investors, and should be properly
priced to reflect this. The cost of audit in the totality of corporate
throughput is minimal and it should be incumbent on non-executive
directors and shareholders to ensure that a proper and responsible
balance between price agreed for audit and the value to the shareholders
is achieved. We have found evidence of fee pressure being used
to intimidate auditors, a practice which we believe to be unacceptable.
One possible solution to this is disclosure to investors that
both directors and auditors believe that the audit fee properly
reflects the value of the audit to the investors and intimidation
has not been used to bring the fee down. We recognise that this
is a difficult area as we do not believe that auditors should
have carte blanche to charge what they like, but more importantly
directors should not have carte blanche to drive the price of
audit down as part of a power game, when this is not in the best
interests of the investors.
In line with our comments about the mixed objectives
of the current corporate annual report and the difficulties of
valuation and risk assessment, we believe that a review of the
purpose of the annual report to users should be accompanied by
a review of the levels of assurance which can be provided by auditors
on some of the more complex valuations. At the moment an opinion
is given on the whole of the financial statements but the levels
of assurance which an auditor can provide on different parts of
the accounts may vary widely. We suggest that debate should be
opened as to whether investors should be provided with much more
information about levels of assurance.
3.4 Motivation and Personal Incentives
We have already referred to the need for audit
firms and those regulating them to review the internal management
of audit firms to ensure that audit partners are not incentivised
by personal considerations of money and status to compromise their
personal independence and thereby compromise their firm.
It is not just auditors who may be in a structure
which encourages dysfunctional behaviour. A proper review of financial
regulation in the UK must include consideration not only of whether
the personal incentives available to all parties can motivate
dysfunctional outcomes, but also whether the incentives offered
are disproportionate to the achievements of the individuals. For
example fund managers may receive incentives to achieve growth
targets, investment analysts may receive incentives to encourage
share trading, directors may have incentives to achieve a certain
level of results because this triggers additional benefits to
them, or they may find themselves under pressure if results are
below expectations. A full understanding of the incentivisation
process throughout our capital markets is essential before one-off
and potentially irreversible regulatory changes are introduced
in any specific areas.
Any framework for regulation needs to have an
effective enforcement mechanism both to deter and to punish offenders.
There is always room for improvement in these areas and we have
had concerns for some time about the length of time it can take
to bring offenders to justice. We have been encouraged by the
DTI's recent actions in disqualifying increasing numbers of delinquent
directors and the planned provisions in the Companies Law Review
should further facilitate swift action against abuse. Furthermore
the enforcement powers vested in the FSA from 1 December will
also help to bring offenders to justice.
In terms of financial reporting and auditing,
the Financial Reporting Review Panel has proved a success in enforcement
of compliance with accounting standards, to the extent that it
is being considered as a model for other countries in the EU.
The establishment of the Accountancy Foundation with its Review
Board overseeing the regulatory activities of the accountancy
bodies and the reform of the Joint Disciplinary Scheme should
expose any deficiencies in these areas and bring about improvements.
There is no room for complacency in any of the
areas of enforcement and the process and procedures must be kept
5. THE WAY
We believe the Enron case has caused great consternation
for two reasons. First, it happened in the US whose capital markets
have long been regarded as the strongest and best regulated in
the world, and inevitably concerns have spread as to whether such
a major collapse could happen elsewhere. Second, the auditors
are facing criminal charges for destruction of evidence, and as
a result have suffered reputation damage on such a scale that
the firm is breaking up.
We make two observations about these events.
First, it is extraordinary that the US regulatory framework for
accounting standard setting, disclosure and oversight of securities,
as managed by the SEC, could have failed to identify accounting
defects on such a scale in such a large company. Second, it is
equally extraordinary that the auditors should destroy records.
Beyond this, there is little to be said which is factually based
until the results of proper inquiries are available.
Andersen are currently bearing the brunt of
the opprobrium, and this in itself will be a salutory lesson for
other audit firms as they perceive how quickly a reputation for
integrity built up over many years, can be destroyed.
No regulatory framework is perfect and no framework
can eliminate corporate collapses, greed, fraud and professional
negligence. The costs of doing so would be too great and would
stifle our capital markets. Our research shows clear evidence
of beliefs that the reforms in 1991 have improved the integrity
of financial reporting, corporate governance and audit. But frameworks
need to be kept under constant review to close obvious loopholes
and make improvements. We believe that the Enron collapse provides
an opportunity for a wide ranging review whilst there is political
will to consider it. We therefore make the following suggestions
which are drawn from this paper and from our research.
1. A review could be carried out of the
purpose of the current financial reporting process in the UK,
as it seems to us to be muddled between stewardship and decision
usefulness. As more valuations are included in company accounts
and the numbers move further away from historical cost, a reconsideration
of the level of assurance which auditors can reasonably provide
may be needed. At the very least users need to understand the
nature of the judgments which are being made.
2. The nature and extent of incentives which
drive all key participants in the capital markets should be understood
and reviewed to ensure that they do not encourage dysfunctional
outcomes and that the rewards are in proportion to the efforts
and performance of the individuals.
3. In order to function properly in the
corporate governance framework, non-executive directors should
be properly independent of management and be clearly mandated
to protect the interests of shareholders. The proposals in the
Company Law Review, and the Combined Code go some way to achieving
this, but could go further.
4. Efforts should be made to bring about
a culture change in attitudes to audit among some company directors.
Audit is not a commodity to be bought by directors who see no
value in it to themselves, nor is it, as some firms would have
us believe, a value added service to directors. The primary value
of audit is in its signalling value to markets and shareholders.
Directors benefit themselves from the signalling that their accounts
show a true and fair view and comply with law and regulations.
5. We are concerned that directors can use
fee pressure to intimidate auditors. We can see some merit in
disclosure to investors that both auditors and directors believe
the audit fee is fair for the benefit provided to investors.
6. A review should be carried out of the
UK auditor independence framework to ensure that the principal
threats to independence identified in our research, ie the personal
incentives for an audit partner to compromise independence to
protect his or her personal position, are adequately addressed
within the audit firms.
7. The current UK independence framework
permits an audit firm to be economically dependent on one listed
company client to the extent of 10 per cent of its gross fees.
We believe this is too high and should be reduced to below 5 per
8. The independence framework, in respect
of listed companies, should also be reviewed to ensure that the
provision of non-audit services does not involve an audit firm
taking management decisions or auditing its own work. Other than
addressing the non-audit services issue in this respect, we do
not support the banning of other services, as the case for enhancing
independence by doing so is not established.
9. Auditor rotation should not even be considered
as a serious option. There are large costs and no obvious benefits.
10. Finally, we caution against any hasty
post Enron action. There have been considerable changes to the
UK framework in the last ten years, some of which are very recent.
The recent changes ie the enhanced powers of the UK Listing Authority
and the establishment of the Accountancy Foundation should be
given time to settle down. Further major changes, in the form
of a Companies Bill and the change to International Accounting
Standards are forthcoming. Now is not the time to allow ourselves
to be bounced into hasty measures because something has gone seriously
wrong in the US.
5 April 2002
1 The Financial Reporting Council receives its funding
from the accountancy bodies, the DTI and City institutions. Back
The Financial Reporting Review Panel is a reactive body which
investigates cases on non-compliance which come to its attention,
either through press reports, complaints or referrals from other
regulators. The Panel seeks to secure voluntary remedial action
from directors whose accounts are found deficient. It has powers
to apply to the courts to enforce remedial action if the directors
decline to co-operate. After 10 years operations no such action
has been necessary. Voluntary compliance has been secured in all
cases. The Review Panel publicises all cases where company accounts
have been found defective. Back
Reporting on these provisions in the Combined Code was deferred
from 1998, pending further guidance, which was issued by the ICAEW
in 1999, Internal control: Guidance for Directors on the Combined
The Accountancy Foundation is entirely funded by the UK accounting
The powers acquired by the UK Listing Authority are included in
the N2 implementation date of the Financial Services and Markets
Act 2000. Back
Two recent public statements by the chairman of the FSA and the
CEO of the UKLA have indicated that the UKLA believes that the
listing rules may pronounce in the future on matters concerning
auditors. See Accountancy Age, 14 February 2002, pp 22-23,
26-27, VNU Business Publications, London, or FSA website for the
speech by the Chairman, Sir Howard Davies, to the World Economic
Forum, 31 January to 4 February 2002. Back
In our paper "Perceptions of auditor independence: UK
evidence", (1999) Journal of International Accounting,
Auditing and Taxation, 8(1):67-107, the existence of an audit
committee composed of non-executive directors, a majority of whom
are independent, is cited by finance directors and audit partners
as most significant factor (out of 25) enhancing auditor independence,
and the second most significant factor by financial journalists. Back
See book chapter "The Financial Reporting Review
Panel: An Analysis of its Activities" Financial Reporting
Today: Current and emerging Issues, 1998 Edition (London, Accountancy
Books) 27-54. Back
The Urgent Issues Task Force pronounces on emerging issues for
which no accounting standards have yet been developed. Back
See paper cited in note 7. Back
See Fearnley and Page (1994) "Audit Regulation
in the UK: Some Preliminary Observations", Journal of
Financial Regulation and Compliance, 2 (2), pp 125-132. Back
This caused problems initially as smaller audits became more expensive
and this led to exemptions from audit being allowed by the DTI
for the smallest companies. Back
See paper cited in note 7 and also "Auditor Independence
and the Expectations Gap: Some Evidence of Changing User Perceptions"
(1998) Journal of Financial Regulation and Compliance, 6(2), pp
See paper cited in note 7. Back
Our paper "Auditor Independence and Audit Risk in the
UK: A Reconceptualisation" was presented at the National
Auditing Conference, organised by the University of Stirling
in March 2002. Back
See Beattie, Brandt and Fearnley (1996) Non-audit services:
Consulting? More Like Compliance, Accountancy, November, pp
We restrict these principles to listed companies because in smaller
companies the auditors inevitably carry out accounting work and
provide extensive advisory services for their clients. In these
cases there is little public interest risk as the businesses are
mainly owner managed. Back
The UK independence framework recognises these issues but we believe
they should be much more clearly defined. For example there is
no ban on audit firms installing accounting systems for their
clients. The framework simply says that the same people should
not be involved. Back
The framework recognises the issue of undue dependence on a client
as a threat to objectivity but stops short of discussing remuneration
schemes for partners. It does suggest that where a partner's income
is dependent on the profits of one office and one client contributes
more than 10 per cent of gross income for that office, another
partner should take final responsibility for reports. Back
See Beattie and Fearnley (1998) Audit Market Competition:
Auditor changes and the Impact of Tendering, British Accounting
Review, 30, pp 261-89. Back
See Beattie and Fearnley (1994) The Changing Structure
of the Market for Audit Services in the UK: A Descriptive
Study, British Accounting Review, 26, pp 301-322. Back
See Beattie and Fearnley (1998) What Companies Want
(and Don't Want) from their Auditors, ICAEW, London. Back
See Beattie and Fearnley (1998) Auditor Changes and
Tendering; UK Interview Evidence, Accounting, Audit and Accountability
Journal, 11 (1), pp 72-96. Back