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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