Auditors In The Spotlight

This week's hearing between the Treasury Committee and

representatives of the auditing profession questions the role of

the auditor in the current economic crisis. The hearing reflects

the fact that auditors are facing increasing difficulties not only

in their day to day auditing of companies but also in respect of

external perception of their work. The Treasury Committee's

inquiry follows mounting criticism of auditors' work and a

growing demand to bring the auditors themselves to account.

Audit risk

Auditors are faced with numerous difficulties when attempting to

audit the accounts of a company during times of economic turmoil.

Two areas prove particularly problematic:

Fair value estimates - In times of economic

turmoil, the nature and reliability of information available to

management to support the making of a fair value estimate (the

price an asset would fetch right now in a sale) varies wildly. This

increases the degree of uncertainty associated with such estimates

and therefore the risk of material misstatement; and

Going concern - Guidance issued by the

Auditing Practices Board states that during times of economic

turmoil, auditors need to ensure that they fully consider going

concern assessments and refer to them in reports only when

appropriate. This highlights the delicate balance required of

auditors in ensuring they do flag genuine concerns but do not cause

alarm unnecessarily.

Litigation risk

The difficulties listed above, combined with the current market

volatility make the profession vulnerable to a variety of claims.

Last summer the US Treasury's Advisory Committee of the

Auditing Profession met in Washington and heard that between them

the six largest firms had 27 outstanding litigation proceedings

against them with damage exposure above $1bn, seven of which exceed

$10bn.

Way forward

Since 6 April 2008 auditors in the UK have been able to agree

"liability limitation" agreements with audit clients

following a change in the law under the Companies Act 2006. This

allows auditors to limit their liability. The risks faced by

auditors in the current economic climate make the use of limitation

of liability agreements potentially more important.

Avoiding any implication of a conflict of interest is also

crucial for auditors. The Treasury Committee has previously

expressed concern at the fees derived from non-statutory auditing

work. Representatives at this week's hearing reiterated this

fear, criticising auditors for accepting...

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