Audit Standards (Hansard, 27 February 2002)

§ Ms Hewitt

It may help if I set the context by first explaining our plans to ensure that there is a careful review of the UK's current regulatory practices for statutory audit and financial reporting, following the collapse of Enron in the US.

The requirements in the UK are significantly different from the US in relation both to the relevant accounting standards and to the oversight and regulation of the audit profession. But it would be most unwise to conclude that problems of this sort could not arise in the UK; and it is right therefore to review arrangements carefully

I am therefore setting up a group jointly with the Treasury, and including the Financial Services Authority and other regulators such as the Accountancy Foundation, to oversee and co-ordinate the response in the UK to these issues raised by the collapse of Enron. These include: whether the ethical standards of the professional audit bodies provide an adequate assurance on the independence of auditors, including the restrictions on the supply of non auditors, including the restrictions on the supply of non audit services whether there should be a requirement for the mandatory rotation of audit firms; or for the mandatory re-tendering for company audit whether current disclosures of audit and non audit fees in company accounts are adequate the role of Audit Committees in relation to the audit engagement the implications for accounting standards in the UK the implications for auditing standards in the UK.

The Group will report on progress and emerging conclusions by the summer.

At the same time I am also setting up an independent review of the role and effectiveness of non-executive directors in the UK. The review will report jointly to me and the Chancellor of the Exchequer. I will provide further details of who is to lead the review and the terms of reference in due course.

Together these reviews are aimed at:

Ensuring that companies can fulfil their potential and improve productivity;
Strengthening the UK's framework for how companies operate; and
Encouraging greater transparency.

The quality assurance systems for the statutory audit, both within and outside the audit firms, are an important part of the regulatory arrangements which give confidence in the audit process.

The European Commission's Recommendation C(2000) 3304 of 15 November 2000 on "quality assurance for the statutory audit in the EU: minimum requirements" recommends that all persons carrying out statutory audits should be subject to a quality assurance system. The Recommendation sets out acceptable methodologies and covers topics such as review cycles, the scope of the review and the quality of the reviewer.

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The United Kingdom has an established system of monitoring of statutory company auditors, which was in place well before the Recommendation was adopted. The bodies recognised under the Companies Act 1989 to supervise registered auditors are required regularly to monitor the performance of audit firms or individual auditors registered with them. My Department asked the recognised supervisory bodies to review existing requirements against the detail of the Recommendation and to report the results. The arrangements were found to be broadly in line with the Recommendation. All audit firms and individual auditors are subject to regular review, including monitoring visits by independent reviewers, and those with public interest clients, such as listed companies, are subject to a higher frequency of coverage.