Memorandum submitted by the Law Society
I refer to the Treasury Committee's above inquiry
and to my letter of 5 April 2002 in that connection.
I understand that the deadline for submissions
to the inquiry was 5 April 2002. However, as you know, the Company
Law Committee of the Law Society of Scotland ("the Committee")
had not had the opportunity to meet to discuss the matter prior
to that date. The Committee has since met on 14 May 2002 and I
write now to bring to your attention the Committee's views on
this issue either for inclusion in the inquiry evidence, if that
is still possible, or for future reference should the inquiry
procedure into this extremely important matter be continued. As
you will see, the Committee has focused on the controls exercised
through the audit process.
The Committee would first emphasise the importance
of drawing a distinction between the US auditing process and the
UK system, which is quite different. In particular, the Committee
considers that the UK system of certification of accounts as giving
a "true and fair view" of the company's status can provide
a greater protection for investors than a system of detailed regulation
as to matters which require disclosure, such as operates in the
US. The Committee considers that greater emphasis needs to be
placed on the professional view of the auditor than on the creation
of a system of detailed regulation as to matters which require
disclosure, which may leave investors no better informed as to
the salient points of the audit.
The Committee is also aware of a gathering movement
towards a separation of the "auditing" and the "advisory"
function of accountants. The Committee acknowledges that such
a separation would provide a safeguard from the danger of an auditing
accountant being influenced by the financial benefit to his of
her firm of any advisory work also being carried out for the audited
company in what is, essentially, a conflict of interest situation.
However, the Committee would point out that such a separation
would also have disadvantages, notably in that it would not allow
valuable experience gained by accountants through advisory work
to inform the auditing process. Moreover, the effect of such a
separation will be felt more greatly by companies of a comparatively
smaller scale, in particular in relation to the financial burden,
which would thereby be placed on them. The Committee considers,
therefore, that if audit/advice barriers are to be erected, the
question to be addressed is how can it best be ensured that the
advantageous features of the present system are retained whilst
eliminating, so far as possible, the interest conflict in a situation
as outlined above.
Also with regard to the interplay between the
audit/advisory functions, the Committee notes that the financial
rewards attached to advisory work are greater than those for auditing
work. Moreover, many accounting firms use auditing as a training
ground for accountants, rather than as an area of work for more
experienced accountants. The Committee submits, therefore, that
the status and remuneration of auditing work need to be raised,
whether the auditing/advisory function are separated or not. The
issue of the cost of professional indemnity insurance for auditing
work, should it be separated from a firm's advisory work, will
also have to be considered.
I trust that this is of some assistance to the
inquiry. If you would like to discuss this further, please do
not hesitate to contact me.
16 May 2002