Action should be taken to close the expectations gap between what audit does and what users expect from financial statements, said Stephen Haddrill, chief executive officer (CEO) of the Financial Reporting Council (FRC), in a speech to the European Commission conference on auditing in Brussels.
Haddrill said that investors should be given more information about the prospects of the company and a better picture of the future of the business and of the judgements made in the course of the preparation of the financial statements.
“In short, we want investors to learn about the business and its future from the directors; we want the directors to say more about the things that really keep them awake at night; and we want to empower auditors to challenge management by requiring them to say whether the board have really given a balanced and fair view on these matters as well as on the accounts,” he said.
Haddrill called on the European Commission to “forge a better balanced triangle between companies, auditors and investors” to “create a partnership in which each plays their full role”.
In comments focused on Commission proposals to increase competition in the audit market, Haddrill said: “We must not do anything in the name of competition that puts quality at risk.” Instead of introducing compulsory joint audits Haddrill said that measures should be taken such as:
- Encouraging financial institutions to use non-Big Four firms as a source of advice to their risk committees.
- Giving serious consideration to amending the current rules on audit firm ownership, allowing audit firms to access external capital to fund expansion.
- Prohibiting the use of ‘Big Four only’ clauses in banking and loan covenants.
He said that audit regulators, competition authorities and firms needed to develop a contingency plan for handling the crisis that would result from a major firm failing. “I would like to see the competition authorities make clear now that they would not tolerate a market dominated by just three firms,” he added.
In other news, the FRC welcomed the publication by the Bank of England (BoE) and the Financial Services Authority (FSA) of a draft code of practice designed to enhance the dialogue between auditors and supervisors of FSA regulated firms. The draft code, which is subject to consultation, will provide a framework to enable regulators and audit firms to work together in an open and collaborative way.
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