Dear Secretary of State

We the Big Six accounting firms, carrying out as we do the overwhelming bulk of audit work done for big commercial and industrial firms in this country, would like to return to the familiar question of limiting our liability in respect of audit and assurance work, and to put to you some new ideas representing, we hope, a more thoughtful and wider approach to this issue.

We now recognise that simply asking the Government to limit our liability in respect of audit is not an easy proposal to go for. We are seen as, and indeed we are, large, rich and powerful. Indeed many of us have spent many recent years bringing about precisely this position and, having got here, now to say that we do not like some aspects of the situation we ourselves have brought about is not attractive. Moreover, though it ought to be irrelevant, our recent ill-advised association with political lobbyists will not have helped. So we felt it right to go back to the drawing board on a wider basis and produce a set of ideas which might better balance our interest and the public interest.

We start from five ideas, thus:

1 The world is becoming increasingly audit-oriented. Public or private, people want to know more about what is going on. This exemplified for instance in the purchaser/provider mould, emerging perhaps chiefly in the public sector but also coming out in the private sector too. People are content to let the detail of the management of a concern largely alone, provided they are content with the appointment procedure for those in charge and that someone independent and competent is reporting to them as to whether the management has been carried out properly.

2 The audit society goes beyond just money and the myth that for large concerns anyway the only people who matter are the shareholders. Big concerns, public and private, and their behaviour, are of interest to the public at large. Wider openness and accountability is going to be called for by the public. The future audit approach has to recognise this.

3 Principally, we are looking at propriety and public accountability.

But examination of efficiency, effectiveness and value for money is also important, and not just in the public sector. While these are potentially opposed concepts, the modern audit and assurance function needs to cover them both, even as it recognises they are different.

4 Audit and assurance reports, however fully and competently carried out, cannot guarantee good or proper management of a concern. But they can provide the raw material in an independent and reliable manner for others, whether they are bodies like the Public Accounts Committee, the Audit Commission, or audit committees of private companies, to pursue apparent shortcomings and failures, preferably in public. There are thus two functions here; the reporting of facts and the subsequent examination of them.

5 Auditing firms have skills, competencies and traditions which enable them reliably to examine the raw materials and come to the objective conclusions on which the factual report can be based. At a time when many of our own institutions are under criticism, accountancy firms and their public sector counterparts by and large remain credible in this sort of area.

Against this background here is the proposal we would make to you. It represents a two-way approach.

For our part:

1 We would extend our audit beyond the present rather narrow financial shareholder audit into wider matters such as equal opportunities, environmental affairs, and so on. We would not be ready to do this on the basis of ‘fishing expeditions’, but if you were to lay down what the government looked for in terms of social behaviour, etc, we would be prepared to report on it.

We can see ourselves as looking to two audit reports each year; a ‘true and fair’ financial report as at present and a wider ‘public interest report’, compulsory for public bodies and large companies, and optional for smaller companies. We see these two reports as the basis for the subsequent public examination of directors and managers as may be appropriate.

2 With the liability position made more certain – see below – we would stop the trend towards pulling our punches, which the present liability regime encourages, and would be ready to be braver and much more direct in our reporting, which must be in the public interest.

3 We would accept the establishment of a government-sponsored body, whether within government or, say, regulated by it within the Institutes of Chartered Accountants, to register auditors recognised for this scheme (effectively as now) and also to determine the outcome of disputes, with or without eventual access to independent arbitration or the courts. This could be part of the Institutes’ present structures or fall out of a separation which they might wish to make for the future between their ‘regularity’ and ‘trade association’ functions, which some of us anyway think is overdue.

4 We would agree to publish full, open and independently audited Reports and Accounts (including public interest reports) in respect of own selves.

These would distinguish clearly between audit and assurance work done for third parties and subject to this new set of arrangements, and financial work, tax, management consultancy etc done more directly for individual clients rather than effectively for the public as a whole. Indeed, some of us may consider a formal split between audit and assurance work and the rest.

5 We recognise that seen from the point of view of industry and commerce we represent an apparently unproductive overhead. Accordingly we would ensure that our fee levels reflected the net costs in respect of additional work which might be done on social and environmental matters, and benefits in respect of any relieving of some part of our professional liability.

We would also submit to an examination of our own efficiency and effectiveness.

For your part:

1 You would detail the requirements of the public interest audit, including details of what you are looking for in the social, environmental and other public interest areas. You would also lay down threshold or other tests which should exempt most small firms in the private sector from this audit.

2 You would engage to arrange that our liability in respect of professional negligence would be restricted to that for which we were truly liable, for which in the first place we would look to the combination of our insurers and a compensation fund we would set up based on an agreed proportion of our agreed income. Details of the scheme would be settled between us.

You would take on responsibility for handling aggrieved people whose claims or alleged claims went beyond what these two sources would provide.

3 The scheme devised would ensure that there was equal treatment between all sizes of practitioners; in other words, there would not be some kind of flat rate floor, and liability would be proportionate throughout amongst other things to the wealth and size of each firm.

4 You would engage that the public sector audit bodies – the National Audit Office, the Audit Commission and their appointed auditors whether District Audit or

the private firms – met the same provisions.

5 At least for the present you would leave appointment of auditors for the purpose of audit and assurance services, and the setting of fees, as the situation stands at present in respect of the private sector. However, we recognise that in return for a limitation of liability and your taking on some part of the potential risk we now carry you will wish to keep this under review.

The idea between these proposals is to move the debate out of the impasse it seems to have reached, and to produce a state of affairs that would be effective and useful to the public interest, the state, the audited bodies and to accounting firms themselves. We would be glad to discuss these ideas with you or your officials.

We are copying this letter

to the Deputy Prime Minister and the Chancellor of the Exchequer …

One recognises that there may be little chance of this draft letter being sent. But it would be nice to think that these sorts of ideas are in thinking peoples’ heads.

Sir Peter Kemp is a chartered accountant and former second permanent secretary to the Cabinet Office.