Strengths and weaknesses of the oversight over the auditing profession in the UK and USA. A description, analysis and discussion

Table of contents

Introduction

The oversight system in the UK

The oversight system in the US

Discussion

Conclusion

References

Mappings

Introduction

In the film ‘ Enemy of the state’ (2007) the American government wants to pass a law which allows wide observation which would endanger privacy. To reach this goal, Senator Reynolds even kills an opposing politician who had tried to avoid this act. By coincidence a wildlife researcher recorded the murder and realised that the news about a mysterious heart attack of the rival was wrong. But in the same moment, the killer realised that their act was discovered. Hence, a wild chase begins. The NSA, using modern techniques tries to find the tape and discovers that the film is in the possession of a young lawyer. So NSA tries to ruin his life and destroy his image. But he has an unknown helper, a former special agent. With this support he is able to get the NSA into trouble and demonstrate that he is innocent. At the end of the movie a simple question can be asked: “who controls the controller?”. The same issue was relevant when Enron became spectacularly bankrupt. This big conglomerate was audited by the accountancy firm Arthur Andersen. Andersen’s company also offered Enron non-audit services like book-keeping and consulting. Through this lack of independence, the auditors were trapped in a big conflict of interest and could not do their work (Frentz, v. C., 2003). Since this huge disaster many changes in the oversight of auditing have taken place. Especially in the USA and the UK, control of auditing was reformed by the government. The following sections will provide detailed descriptions of the oversight systems in both countries. Afterwards a discussion and a critical analysis will outline the pros and cons for each regulation scheme and a consideration of the best way to point out the advantages and chances for oversight profession will be presented.

The oversight system in the UK

After the huge fraud debacle of Enron, or even WorldCom, the government in London recognised that the oversight system of the auditing and accounting profession was obsolete.

So the Department of Trade and Industry announced, in January 2003, wide changes for these financial businesses. The former Financial Reporting Council and the Accountancy Foundation merged into one big unit under the lead of the Financial Reporting Council (FRC) as an Ltd. Through this decision, the structure and the flow of information were much more simplified. The cabinet tried with this update to set up a world-class standard in corporate governance and audit quality (Gouernsey Society of Chartered and Certified Accountants, 2004). The FRC’s responsibilities have been enlarged and now it takes a great role in the development of corporate governance, for example the Combined Code of Corporate Governance from 2003 and the review in January 2006 of the implementation of the code (Newcombe, 2007). In the position of an independent supervisor, the council has also other remits like: the introduction of accounting and auditing standards and therefore also the monitoring and enforcement of these regulations. Furthermore, the oversight of auditors and a permanent quality control of their work are important tasks of the FRC and the subsidiary boards. The council consists of up to 30 members who guarantee a wide representation from business, investors and other stakeholders. The five directors are nominated by the Department of Trade and Industry (Financial Reporting Council, 2007). The structure of the Council is illustrated in the figure below.

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Each of these five boards is specialised in a main activity and the two most important which are linked with the assignment topic will be described.

The Auditing Practices Board (APB) works on the implementation of International Auditing Standards relating to independence, objectivity and integrity for auditors in the UK and also Ireland. In addition to this function the establishment of frameworks and guidelines are another part in the whole auditing oversight. Also, the APB is assigned to promote ethical standards which should help the accountant to decide on the right option in a difficult situation. All in all, these sources should help to reach an excellent Corporate Governance (Chitty and Vellacott, 2004).

The Professional Oversight Board (POB) and former Professional Oversight Board for Accountancy (POBA) is, as the name already says, concerned with the oversight of the whole audit regulation. Also the POB is responsible for approving Recognized Supervisory Bodies (RSBs), established since the Companies Act 1989, which should monitor the work of auditors or offer further education to reach a standard level (Anon, 2005) 7. Hence the board is responsible for ethical issues. This includes the measurement of audit firm’s performance then reviewing the balance sheets of listed companies or other entities. (Gray and Manson, 2005).

To fulfil these complex and important tasks as effectively and as neutrally as possible, the Audit Inspection Unit (AIU) was formed. The inspectors report directly to the POB. The AIU teams mostly consist of two or three people with great experience and are selected out of a various industries. If the panel finds failures and therefore present recommendations, their word is law. So the company has the chance to eliminate the reason for complaining or otherwise they can be punished with different sanctions. (Evans, 2004). At the beginning of 2004/2005 the supervisor visited the big four accounting specialists, KPMG, Deloitte, PWC, E&Y and big listed companies. In the second period the big four were reviewed again to see if improvements had taken place and also smaller enterprises which were in the FTSE350 index were inspected. In 2006/2007, the controls extended to less significant businesses. These broad and effective checks, guaranteed a big acceptance of the auditing and ethical standards (AIU, 2007).

The oversight system in the US

Like the UK, the bankruptcies of Enron and WorldCom triggered a renewable process in the US. The insolvencies of the companies were supported by failures in the auditing process. For these reasons the Sarbanes-Oxley Act (SOX) passed the U.S. Congress in 2002. Many people regarded this law as the most important change in the audit profession since 1933. Because of this bill, the relationship between companies and accountancy firms changed dramatically. The best example is that an audit company must not offer a non-audit service like consultancy to an audit client. So the firms separated the departments very strictly (Arens, Elder and Beasley, 2006). The senators Sarbanes and Oxley aimed for much higher standards in corporate governance issues and accountability. Furthermore, they created in Sector 101 of the law, an institute for an independent regulatory framework, the Public Company Accounting Oversight Board (PCAOB). Above all, they represent a better quality and transparency of financial statements. Also, for this reason a much more powerful Security Exchange Commission (SEC), as a state oversight, is needed. (Knechel, Salterio, Ballou, 2007). The structure of the new oversight system is printed in Figure 2:

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The PCAOB is an independent board of non-auditing experts which is non profit orientated. Atypically the body consists, by law, of five primarily non accountants. Only two of these five members must have expertise in the accounting sector (Kinney, 2005). The SEC is authorized to appoint the directors for five years and has also the possibility to dismiss a regulator, if he fails to follow the rules. In this way, the SEC is the direct supervisor of the PCAOB and oversees it (Wells, 2005).

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