Should auditors be subject to independent regulation? Confidence in the profession has been at a low ebb for some years, following a succession of spectacular company failures. There is also growing concern about practices such as low-balling - when a firm quotes an uncommercially low audit fee in the hope of picking up other work (mainly consultancy) from a client.
Leading accountants Ernst & Young have called for an independent regulator, breaking ranks with the remainder of the Big Six which15e would rather continue with the existing system of self-regulation. 'The only way we can claw back confidence is by being regulated externally,' insists the firm's technical partner Allister Wilson. Not so, cry his competitors. 'The real way to restore public confidence or credibility is for auditors demonstrably to do a good job,' maintains Tim Baxter, on behalf of Coopers & Lybrand. 'We are a profession,' Baxter emphasises. Abandoning self-regulation would be 'like throwing in the towel, saying we can't do it ourselves, so let's get someone else to do it'.
Outside the profession, attitudes seem equally divided. 'We don't see any benefit in an independent audit regulator,' says a spokesman for Scottish Widows, a major institutional investor. The opinion is echoed at TSB: 'We feel that auditing regulation is adequate at the moment. We're strong believers in self-regulation.' On the other hand Ernst & Young claims to have received numerous letters of support from both leading companies and institutions - although some may prefer to keep their views to themselves.
Ian Duncan, deputy chairman and finance director at Tomkins, the industrial conglomerate, is one executive who is prepared to express some sympathy with Ernst & Young. Given that an expectations gap exists, 'something else - and ideally something independent - may well be a very sensible step forward'. But just what that should be Duncan is less sure. 'Who would want to set themselves up as regulators? Paid professionals? People taken from outside the industry, like ombudsmen. We all know from other industries how difficult that can be.' On the matter of low-balling Duncan favours caveat emptor. 'When we put our audit out to tender four years ago we said to firms ... that if they low-balled they wouldn't get the job.' Nevertheless one nameless member of the Big Six chose to undercut the rest by 20% - no mean sum with a £1 million audit. The firm was removed from the shortlist as a result. But Duncan believes it is the client's responsibility to deal with situations like that.
Ironically, low-balling is a problem about which the profession has already elected to take independent advice. In June the Institute of Chartered Accountants in England and Wales appointed an outsider - Elizabeth Llewellyn-Smith, an ex-deputy director of fair trading and now principal of St Hilda's College, Oxford - to head a group examining the subject. A modest first step, the move nevertheless adds force to the notion that professionals should be open to external advice.
Ernst's proposal is that the industry's own standards setter, the Auditing Practices Board (APB) should be placed in a subordinate role to the Financial Reporting Council (FRC), an independent body whose chairman is appointed by the Government and the Bank of England. The FRC already controls the Accounting Standards Board (ASB) so there is a lot of sense in its taking on audit regulation too. In the first instance, Ernst suggests, the new APB should be responsible only for regulating firms in situations where the public interest is clearly involved: as in the case of quoted companies, major charitable organisations and companies regulated by the Financial Services Act such as pensions institutions.
Emile Woolf, a partner in one of the smaller firms, Kingston Smith, agrees that independent regulation should be introduced initially for work where the public interest is involved. The resources of the bodies involved in the self-regulatory regime are severely stretched, he points out. Moreover they are directed mainly towards the myriad smaller firms rather than the Big Six. 'The Big Six are huge. That's precisely why a separate body is needed. It's difficult to do a good job at both ends of the market.'
In any case independent regulation is going to come, Woolf reckons - especially if Labour wins the next general election. The tide does seem to be turning that way, albeit slowly. External regulation cannot be expected to eliminate fraud or sharp practice altogether, or to prevent occasional lapses in auditors' judgment. But since self-regulation has patently failed to inspire public confidence in the accountancy profession, this may be the right time to consider possible alternative solutions.