Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 154-159)




  154. May I open this meeting by welcoming you, Sir John and your colleagues from the Accountancy Foundation; we are delighted to see you this morning. For the sake of the shorthand-writer, may I ask you to introduce yourselves, please?
  (Sir John Bourn) Yes, Chairman; thank you very much. On my immediate right is Mr Richard Fleck, of the Auditing Practices Board, and Mr Jon Grant, who is the Director of the Auditing Practices Board; and on my left is Dr Colin Reeves, who is the Director of the Review Board.

  155. Welcome. I will start by asking about the Foundation and its constituent bodies, in particular, how long the new arrangements for independent regulation of the accountancy profession have been in place, how well, in your opinion, you think that they are working, and how well they have been received by the accountancy bodies?
  (Sir John Bourn) Thank you, Chairman. The Accountancy Foundation was established in January 2000, it resulted from discussions between the accountancy institutes that operate in the United Kingdom and Ireland and the Department of Trade and Industry, and it was established under the chairmanship of Lord Borrie. Beneath the Accountancy Foundation there are four bodies, so it is quite a complicated structure, as you look at it. There are three, what I might term, operating Boards. There is the Auditing Practices Board, which is concerned, as the name indicates, with the developing of standards for auditing accounts. There is the Ethics Standards Board, which has the responsibility of considering and recommending any improvements in the ethical standards of the accountancy profession. And there is the Investigation and Discipline Board, which will be concerned with those disciplinary cases which pose issues of public significance. Also, and reviewing the work of those bodies, is the Review Board, of which I am the Chair, and our responsibility is to review the activities of the three Boards that I mentioned, and also to review the self-regulatory activities of the six institutes who make up the Consultative Committee of Accountancy Bodies. So the Review Board, as it were, looks at the work of colleagues within the Accountancy Foundation, and also looks at the work of the six institutes themselves. We have, in our work, the four bodies, the right to make recommendations which will, and this is the rubric, be normally accepted by the CCAB bodies, the six institutes. The Accountancy Foundation was established in January 2000, the Review Board came into operation in January 2001, the time in-between those dates was needed to recruit the members and work out ideas about operation. The Ethics Standards Board came into operation in October 2001, the new Auditing Practices Board, because the Auditing Practices Board had been in existence for a long time, came into operation in May 2002, and the Investigation and Discipline Board is due to come into operation later in 2002. The idea of this scheme of self-regulation is that it should be reviewed by the CCA Bodies and the DTI after five years' experience of it to see whether it has been a success. You asked for my opinion, and I think that the work so far has been successful. I suppose, in a way, I would say that, would I not, because I have a significant part to play in it, but I think it does represent what is a continuing feature of many aspects of British life, to look to elements of self-regulation of the profession, and the idea that, in serving the community, the first responsibility for standards should lie with the members of the profession themselves. But, at the same time, in modern life, we expect the Government to have a concern for the effectiveness of the system, and this is why the DTI was concerned with setting it up and will be concerned with reviewing its progress, together with the CCA Bodies, after the five-year spell.

  156. One of our previous witnesses mentioned that, within the regulatory framework, there are 23 separate bodies, and that is a bit of a hotchpotch, and a very hard to manage system like that; so I would not mind your views on that, but also your views on the non-statutory element of the system and the funding. Given that it is funded by the profession, to what extent do you consider it to be perceived to be independent, and might that perception not be strengthened by, first of all, putting it on a statutory basis, and, secondly, financing it out of public funds rather than the profession itself financing it and risking the perception that there is a self-interest there?
  (Sir John Bourn) Thank you, Chairman. I will take those. Yes, 23 bodies altogether have a hand in different aspects of accountancy, and, of course, 23 bodies is an extraordinarily large number. I think though that for the main thrust of the work involved in regulation it is, in fact, simpler than that. There are, of course, two elements, main elements, for the oversight of the accountancy profession, there is the Financial Reporting Council, which is concerned, in particular, with accounting standards, and there is the Accountancy Foundation, particularly concerned with ethics, investigation and auditing. So if you look at this from the point of view of the citizen, if the citizen has some disagreement with an accounting standard, if they quarrel with that, this can be raised initially with the Accounting Standards Board, and then with the Financial Reporting Council. If you feel that the accounts of any particular company have been drawn up incorrectly, you can take it to the Financial Reporting Review Panel, which again answers to the Financial Reporting Council. If you have a quarrel with an auditing standard, you can take it to the Auditing Practices Board, and, by extension, to the Review Board. If you have a quarrel with the way in which an individual auditor has carried out his, or her, responsibilities, you can take it up with the institute of which that person is a member, because there is a duty on the members of the institute to carry out the audit in accordance with the auditing standards. So you can say there is a basic quadrant, if you like, there is a way in which you can complain about accounting standards and the way in which accounts are drawn up in individual cases, there is a way in which you can complain about auditing standards and how particular pieces of auditing have been done. So there is at the centre, Chairman, a relatively simple approach, but it is true, you rightly say, that 23 bodies, in one way and another, have a hand in it all; and I suppose really it would be to strain credibility to say that 23 was the right number. You asked me about the non-statutory elements; that, of course, is particularly the Accountancy Foundation, since no part of that rests on statute, and it is, of course, a body which, although set up in agreement between a Government Department and the professional bodies, is funded entirely by the profession itself. My experience here is that if you have a statutory framework you have greater force, greater standing and greater significance. I am here relying, if I may, Chairman, on my own experience as Comptroller and Auditor General, where the fact that I have statutory backing for what I do is certainly a help to me. I think that the establishment of the Accountancy Foundation on, it is the case, a non-statutory basis is perhaps the test case in which we will be able to see, over its five years, whether, in fact, the traditional British approach of regulation by the profession itself really does work in modern times. I think that will be the time at which, and your Committee may be concerned with it then, as well as the DTI and the CCAB. I think in the modern world questions do arise as to whether a body can really be independent if it is financed by the profession itself, and I think it is harder and harder to convince the world at large that that is the case. Speaking for myself, if it were decided that there should be some Government money in the Accountancy Foundation, I do not think that it would affect our independence and the work that we did. Remember that there is Government money in the Financial Reporting Council, so one of the pillars already has some Government money in it; and I think the question of bringing Government money into it is very much on the agenda, I think at the present time people, in a sense, would draw comfort from that, if it were to come about, but, as I say, there is an opportunity to review that in the light of experience. And, finally, you asked me about the money we get from the accountancy profession. The Foundation had £2.8 million in 2001 and it has got £2.6 million in 2002, and it has got £2.7 million in 2003. I think, myself and my colleagues in the Foundation feel that is reasonable money for what we are doing; if we did not believe it was reasonable, we would not be here, because nobody makes us come here. We are here, if you like, as volunteers, and we would not do it unless we thought it was adequate. And, by adequate, we do not mean generous; and, of course, if you have this kind of money for the work that we have to do, there are certain sorts of regulational oversight that we cannot afford to do. I cannot afford, for example, to hire the Albert Hall and have a great conclave to examine what people think about accountancy and how well it is organised; but, in terms of the kinds of studies we are about, and you will have seen from the evidence that we submitted to you what we are about, for those studies we feel that we have adequate funds. But we feel also that this is a matter of continuing discussions and negotiation, which Lord Borrie and his colleagues undertake with the CCAB year by year, and we are concerned, of course, all of us here this morning, that, in fact, we do get the money to do it properly, because if we do not we will not be here.

  157. That was a very clear answer, Sir John, thank you very much. One of the reasons why we instigated this inquiry was the remarks of Sir Howard Davies, in New York, in January, at the World Economic Forum, when he asked the question, could an Enron happen in this country, and he says the only honest answer to that is, it could, yes. So we find ourselves thinking along the lines that Sir Howard was thinking. And in America, in the past few weeks particularly, a number of things have been happening. I was in the United States at the time when the Chairman of Goldman Sachs, Hank Paulson, said that the business community was at the point of low repute; and the Dow Jones industrial average fell, and one reason ascribed to that was the fears that investors could no longer trust figures in corporate accounts. So can investors in the United Kingdom trust figures in corporate accounts, and is there the same loss of confidence in the United Kingdom; and, if there is, what steps have been taken by and through the Foundation to seek to restore that confidence?
  (Sir John Bourn) I think, Chairman, perhaps this is an issue on which I might, if I may, ask Mr Richard Fleck to talk. Because, of course, there is great concern, particularly on the part of the Auditing Practices Board, who lay down the standards, who are especially concerned in matters of auditing standards and associated corporate governance issues. While nobody would ever claim that any kind of audit, however organised, would guarantee you 100 per cent truthfulness and effectiveness, in order to do that, we would all have to be auditors, and nobody would be able to produce goods and services, but we are concerned, in the United Kingdom, I think it is fair to say, that there are important differences between the way in which the profession is organised in the United Kingdom and the United States. But, Chairman, if I might ask Mr Fleck to take it on from that point.
  (Mr Fleck) Thank you, Sir John, Chairman. I think the starting-point to the answer to your question is, first, to endorse entirely what Sir John has said about the fact that there can never be a guarantee that there is not going to be failure somewhere; but also to suggest that we need to look back at our history and recognise the fact that, at the end of the eighties and the early nineties, we had our own lack of confidence in the financial reporting environment, which arose out of events like Maxwell, and so forth, which led to the Cadbury Committee and the succession of committees that have followed from it. The result was that we, over here, have put in place a number of procedures, which are now being reflected in the US recommendations that have recently been promulgated. The Auditing Practices Board has been concerned about a number of issues, notably the relationship between the auditors and the independent directors, the role of the audit committee, and has been concerned about what we have termed "aggressive earnings management", and you may recall that, in advance of the Enron debacle, we actually issued a paper identifying some of the concerns that we had going forward, recommending that people consider what ought to be done to try to stem some of the practices which were concerning us at the time. The result is that, whilst, as I say, we cannot guarantee it will not happen, we believe we are in a slightly better position, in terms of our understanding of the dynamics and our development of approaches to address them. The other thing I would just add is that there is a fundamental difference between the way in which people audit over in the States and the way in which they do over here. I think you have heard already, Sir, about the difference between rules and principles, and the concept of true and fair, as it compares with "fairly presents" in accordance with US GAAP; that is a very important, fundamental difference. I would not like to suggest to you that it is a complete safety net, but it is a difference that we attach importance to and which we try to reinforce through the standards that we promulgate.

  Chairman: Thank you. On the issue of auditing from a public perception, the public consider, I think, that when a company's books are audited then that is a clean bill of health, but the more we get into this, the more we talk to the profession, that is not the case. In fact, last week, along with my colleagues, we were in the City, where one influential City manager said, "Well, we are in auditing, it's just a trade-off between the management and the auditors." That gives a little bit of concern, because there is a public perception here, and there is a public interest; and this is what we want to probe more, to get a greater understanding and maybe to inform the public, in as simple language as possible, exactly what the situation is. So, with that in mind, and the public confidence and the public interest, I would ask Kali Mountford to pursue those points.

Kali Mountford

  158. First of all, I would like you to define what you think is in the public interest; how do you define it?
  (Sir John Bourn) I think, and colleagues may wish to add to this, what is in the public interest is that the accounts of an organisation should set out clearly how much money it has had in and what it has done with that money, what assets it has, what assets it has relinquished during accounting periods, so that you have an account of the financial resources that an organisation has had at its disposal. And then you look to the auditor to give you some degree of assurance that that statement is generally correct; and this, of course, I think, is where the doubts that the Chairman and others have expressed begin to come in, because what can that mean. And, in particular, what can it mean, I think, is at the bottom of people's concerns is the fact that in almost all cases, although not in the audit of public funds, that the auditor depends on the auditee for the fee, so there is the question, can you really rely on the auditor, if the auditee is paying the fee, is there some essential problem about that. Now that has always been there, from the time accountancy developed in its modern form in the late 19th century, all the things that Mr Fleck has described are the attempts of honest people to provide assurance that the auditing will be done by honest people, who will do their best and will speak up. But to make that work, of course, it does not depend just on the auditor, it does depend on the management of the concern itself, and that takes one into all the issues of corporate governance and, in particular, the whole range of activities on non-executive directors, and to what extent are they prepared to stand up and be counted separately from the executive management of the company. A lot of the work which the APB has been concerned with is providing the advice to the non-executive directors, that they can take an independent position and can speak as they think they should speak to the shareholders; there is another study of non-executive directors, under Mr Derek Higgs, which has been commenced in that respect. So I think those are the elements which have to be looked at, that to serve the community it is a combination of the professionalism and honesty of the accountancy profession, but it is also the responsibilities of the directors, non-executive and executive, of the companies to collaborate in the serving of the public interest. It is in everybody's interest that this should work, because unless it does work and unless there is trust, capital markets do not work, the modern economy does not work, so it is actually in everybody's interest not to cut corners but to face problems when they occur. And, certainly, our work on the Review Board, as with my colleagues on the Ethics Standards Board and the APB, is very much around the whole question of showing how the non-executive directors, audit committees in particular, can be given the kind of advice, guidance, help, to make them have the guts to stand up and speak the truth on these matters.

  159. So you have described a distinct set of criteria now, by which we could perhaps examine public interest, particularly around areas of independence and transparency; how can the Review Board itself monitor that?
  (Sir John Bourn) We have the task, of course, of reviewing what our colleagues on Ethics and Auditing Practices Boards may say, and it will be for us, and we are a set of people who, although two of us technically are accountants, none of us is an auditor, and most of us are not accountants at all, and we will say if we think that what comes out of Auditing Practices and what comes out of our Ethics colleagues is not up to scratch, we will talk to them about it, of course, but if, at the end of the day, we do not think it is good enough we shall say so. And, in terms of our reviewing the activities of the six institutes, we have a programme of work which has looked at how they handle complaints, which will go on to look at how they handle training and what attention in the training of accountants is paid to matters of ethical concerns, and also what attention is paid to quality control in firms. And what in firms is, if you like, the culture of firms and the remuneration in firms, is one of the areas which we are particularly interested in, the extent to which, and again it is an aspect of perception, in firms, it appears, or may appear, that the remuneration of those who work for the firms turns around getting more business, and to what extent does it turn around doing work of good quality. But we are concerned and interested in the way, and have things to say about the importance, right across the operation of the accountancy institutes, of how all these matters are attended to.

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