DTI must act to restore faith
The government and the financial services watchdog need to step up their efforts to crack down on companies involved in 'wrong accounting' and not rely on auditors to solve the problem, new research has revealed.
Results of a consultation released by the Auditing Practices Board yesterday coincided with trade minister Patricia Hewitt’s pledge to launch an investigation into UK auditing following the Enron collapse and the involvement of the company’s auditors Andersen.
But the APB findings show that respondents to the consultation believe auditors alone cannot counter ‘accounts manipulation’ by companies nor will more auditing standards halt the trend.
Only a concerted effort by the government, the Financial Services Authority and institutional investors can help stem the economic and commercial pressures on company directors to inflate profits, according to the findings.
The research suggested that the DTI should accelerate the implementation of company law reforms, particularly the requirement for a mandatory operating and financial review, while the FSA should remind directors of the relationship with the OFR and their responsibilities under the combined code.
Other recommendations include increased pressure from institutional investors on remuneration and audit committees to avoid conflicts of interest and the publication of a new standard on revenue recognition.
The APB said that it planned to provide some additional guidance for auditors on aggressive earnings management. The board also urged the problem to be solved at an international level.
‘The APB has already encouraged the International Auditing Practices Committee to address the issues,’ said the APB.
‘Wrong accounting’, according APB chairman Ian Plaistowe, is a result of pressures on directors; to stretch company earnings to match expectations and understate profits to reduce tax liabilities. Changes in remuneration packages are also a factor.
