“A FRAMEWORK OF INDEPENDENT REGULATION FOR THE ACCOUNTANCY PROFESSION”
by
Jim Cousins
Labour MP for Newcastle Central
Austin Mitchell
Labour MP for Great Grimsby
Prem Sikka
Professor of Accounting, Essex University
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INTRODUCTION
We are pleased to make a public comment on the DTI’s consultation document. Whilst the document contains some worthwhile proposals (e.g. greater lay and public representation on regulatory structures), its general thrust is unacceptable. The government proposals show considerable concern for appeasing the accountancy industry. They show little concern for the welfare of those who have lost jobs, investments and savings as a result of audit failures and abuses by insolvency practitioners. The proposals do not fulfil Labour’s manifesto commitment to introduce ‘independent’ regulation.
The consultation paper provides no moral, economic, ethical or social
argument or evidence in support of the proposals. A large amount of independent
research is available to show that the accountancy bodies are unable to
combine their regulatory and trade association roles. Yet the DTI
makes no reference to it. It appears to be promoting the structures and
policies that have already failed. The DTI proposals introduce even more
complex regulatory structures which will inevitably facilitate further
obfuscation. The structures facilitate buck-passing and concerned public
will continue to be passed from ‘pillar to post’.
In this document we draw attention to a number of omissions from the
consultation document and sketch out the contours of an alternative proposal
which is consistent with the ‘independent regulation’ regimes developed
by other government departments (e.g. the Treasury).
SOME OBSERVATIONS
? The government’s proposals do not meet the Labour’s manifesto commitment of delivering “a framework of independent regulation for the accountancy profession”.
In our view, for any regulation to be genuinely independent, the processes of regulation must be independent of established vested interests in the form of accountancy firms and their trade associations. The DTI proposals do not apply this principle. Indeed, they do not appear to be based on any explicit principle.
? The public interest required that the DTI develop proposals for regulating the accountancy industry. In contrast to the Treasury Department which developed proposals for an independent statutory-based Financial Services Agency, the DTI failed to develop any regulatory proposal. Instead, the Ministers have simply tweaked the Swinson proposals. Seemingly, the Ministers have attached more weight to the representations by organised accountancy interests than the concerns for the welfare of the victims of the accountancy industry.
? The Swinson proposals were initially contained in a document titled “Modernising Regulation – The proposals of the leading accountancy bodies”. The document contains no analysis or reference to any of the scandals or the track record of the accountancy bodies in dealing with them. So what persuaded the DTI to accept them?
Historically (with the support of the DTI), the accountancy trade associations have taken little action against major accountancy firms involved in audit failures and other misdemeanours . Indeed, the DTI and the accountancy bodies have been engaged in covering-up the involvement of accountants in money laundering .
? Historically, the DTI has done little to force the accountancy industry to accept social obligations. Indeed, it is noticeable that the Treasury has initiated policies relating to auditor responsibility for reporting frauds to regulators. The Home Office is developing policies relating to accountants’ responsibility for reporting money laundering. What is the DTI doing to enhance auditor accountability?
? On 26th November 1998, Stephen Byers (previously Chief Secretary to the Treasury, now the Secretary of state for Trade & Industry) said that “The Financial Services and Markets Bill will, by creating a single regulator with a single authorisation process, a single compensation scheme, a single ombudsman, and a single appeals tribunal, reduce the amount of regulation whilst at the same time provide for greater accountability”.
None of the above principles have been applied to accountancy and the Ministers have offered no explanation.
The DTI document says that the government does not favour (for the time
being) a statutory route. Yet the statutory route is already applied to
accountants selling financial services.
? Rather than reducing the number of overlapping regulators, the government’s
proposals result in five regulators for auditing, eight for insolvency,
plus the Joint Disciplinary Scheme (JDS), the Auditing Practice Board (APB)
and myriad authorisation and disciplinary committees. In addition, the
government is creating new unaccountable quangos. These include The Foundation
and The Review Board. Why do 1,800 insolvency practitioners and 9,500 auditors
need so many duplicating regulators? The imposition of a single statute-based
regulator would reduce costs, be more effective and aid public accountability.
It seems that appeasement of the accountancy industry has a much higher priority at the DTI.
? No estimate of any financial cost is published in the consultation paper. The ‘insiders’ claim that the costs are likely to be in the region of £500,000 to £5 million. The government believes that big business and the accountancy industry will provide such funding though in reality the cost will be borne by the public at large.
The accountancy industry and its sponsors are not in the habit of giving away shareholders and/or their members or partners monies. They will inevitably exercise influences over the issues that need to be looked at or ignored. In pursuit of their members’ economic interests, the accountancy trade associations have always been obliged to pursue partisan policies (e.g. seek further liability concessions for their members ). The same bodies have also used the standards setting process to encourage ‘passive audits’ . So why would they behave any differently? The same bodies cannot be public regulators and trade associations. If the DTI has any contrary evidence, it should publish it.
No one can seriously believe that the puny accountancy trade associations have any capacity to regulate giant multinational accountancy firms. The world-wide income of the Big Five is estimated to be more than US $51 billion a year (Financial Times, 19 September 1997, p. 1), large enough to dwarf the income of many countries. With their considerable legal, economic and political resources they already control the values and agendas of major accountancy bodies.
The House of Lords in the case of Prince Jefri Bolkiah v KPMG have already shot down the government’s arguments over “the Chinese Walls”.
Accountancy bodies are already squabbling over the costs (see Accountancy Age, 28 January 199, p. 2). What will happen in the future years? He who pays the piper always calls the tune.
? The DTI proposals pay no attention to the specific regulatory issues in the accountancy industry. For example, despite claiming to be ‘global’ major firms do not co-operate with any ‘local’ regulator. Thus Price Waterhouse (UK) refused to co-operate with the US regulators over the BCCI audit failures (see Kerry and Brown, 1992). KPMG did the same over its role in failures at Ferranti.
Senators Kerry and Brown concluded that partnership structures are not appropriate for major firms. Indeed, the DTI could insist that all UK firms should be required to ‘co-operate’ with international regulators. This could be part of the conditions under which accountancy firms are licensed to operate in the UK. However, historically the DTI has been concerned to shield accountancy firms from any public scrutiny and one suspects would take little notice of the pressing issues.
? The government consider that the community at large has an interest in matters relating to regulation, but the DTI Ministers have no plans to give Parliament any opportunity to debate its proposals. Why ?
? The recent House of Lords judgement on the Pinochet case has shown that no one with an ‘interest’ in any case being heard should preside or participate in any hearing. However, under the government’s proposals, the accountancy trade associations, other accountants and handpicked persons will sit on various disciplinary panels. The organisations which finance the regulatory structures (e.g. the ICAEW) will filter all the complaints and hold disciplinary hearing and/or refer the matters to the JDS. There is no independence and none owe a ‘duty of care to anyone. Why is the DTI keen to apply the procedures and structures that have already been considered unacceptable by the Law Lords?
? It would be unusual for any judge and jury to fine someone for misconduct and then proceed to retain the fines for their own use. Yet the government is backing this arrangement for accountancy. Any fines levied will go straight to the coffers of the accountancy trade associations, the very organisation which have presided on the degradation of audits, audit failures, poor regulation and education. None of fines are to be used to compensate injured stakeholders, but the accountancy trade associations are being rewarded.
? The consultation document does not say which Minister(s) will accept responsibility for the operations of the new quangos. Previously when challenged (in relation to the activities of the Auditing Practices Board), the Ministers declined to investigate any complaint by saying that
“the APB is a private body, I am not answerable for its activities (letter from the Minister for Corporate Affairs, 17 September 1991).
“The Auditing Practices Board is not body set up by the statute “ (Hansard, 15 July 1994, p. 22).
As the regulatory regime proposed by the government is ‘private’, would the Ministers explain who is answerable to Parliament and the public.
? In his report on the closure of BCCI,. Lord Justice Bingham stated that the “Determination of the correct relationship between client, auditor and supervisor raises an issue of policy more appropriate for decision by parliament than by the Bank and the accounting profession” (page 189).
All political parties accepted the Bingham Report. It requires that all matters relating to auditor responsibility be examined and legislated by Parliament especially as auditor duties have an impact on all stakeholders. However, the DTI continues to delegate policymaking aspects to the Auditing Practice Board. This is contrary to all the principles of democracy.
? Despite the liberal sprinkling of the phrase ‘the public interest’, the government’s proposals are totally out of line with the developments in other sectors.
For example, there is no independent ombudsman and no compensation scheme.
The public has no right to attend the meetings of any of the regulators or the quangos.
The public has no access to the agenda papers of any of the regulators.
Various quangos and the JDS will operate as quasi-courts but the complainants will have no ‘right of appeal’. However, the accountants brought before the Panels will have a right of appeal. Why?
None of the bodies listed in the government’s consultation paper owe a ‘duty of care’ to anyone affected by their actions. Without such obligations, none of the bodies have any economic incentives to act in an efficient and effective manner.
? The DTI, as usual, too easily buys into the rhetoric of the accountancy trade associations. For example, it claims that there is a close alignment between public and private interests …. “ (para 10). However, no evidence is provided in support of such assertions. Anyone with any familiarity with accountancy knows that the accountancy trade associations have a history of opposing reforms, which advance public accountability. They have opposed matters such as, the publication of the profit & loss account, balance sheet, group accounts, need to show replacement costs, disclosure turnover, the need for independent audit committees, any obligations for auditors to act exclusively as auditors, the need to report matters such as fraud to the regulators .
We are unable to secure any substantial evidence, which might support the DTI’s claim and invite it to publish its supporting evidence.
? The DTI document continues to make reference to professional ‘ethics’. Yet provides no examples. Most of the so-called ‘ethical’ guidelines are developed after major scandals . None have required accountants to do the ‘right thing’. None of the accountancy bodies have ever urged their members to owe a ‘duty of care’ to individual stakeholders, or publish meaningful information about their affairs. The major accountancy firms are multinational businesses. In pursuit of profits, they have willingly violated ‘ethical codes’ (see Mitchell et al, 1994).
Again, we invite the DTI to publish meaningful evidence in support of its assertions.
? In para 30, the DTI refers to the range of bodies, which might make nominations to The Foundation. It should be noted that considerable representational rights have been given to ‘producer’ interests, little effort has been made to represent the ‘consumer’ interests. More specifically, there is no mention of trade unions and the organisations representing the victims of audit failures and the practices of insolvency practitioners.
? For some reason the government considers the operations of the quangos
to be a ‘private’ matter. It does not require that all nominees to them
would be vetted according to a publicly declared criteria and examined
by the House of Commons Trade & Industry Select Committee.
PROPOSALS FOR DEVELOPING DURABLE PUBLIC INTEREST STRUCTURES
In our view, the DTI in unfit to be a public regulator. It has too many conflicting interests. It is a sponsor, promoter, defender, and protector of the accountancy industry. Historical evidence shows that this has taken priority over defending and advancing the consumer interests. For any regulation to be effective, the relationship between the regulated and the regulator should not be close and cosy. Yet, the DTI has been ‘captured’ by the accountancy industry.
The accountancy trade associations are financed and controlled by their members. Their purpose is to advance the economic interests of their member and secure niches and monopolies (e.g. external audits, insolvency) for them. They cannot perform both regulatory and trade association roles.
We believe that for any regulatory system to command public confidence,
it must be independent of the DTI and the accountancy trade associations.
Its principles should be:
1. For any regulation to be genuinely independent, the processes of regulation must be independent of established vested interests in the form of accountancy firms and their trade associations.
2. This requires the setting up of a ‘new body’ that would be responsible for accrediting, licensing, monitoring and disciplining audit suppliers. This body would be independent of the accountancy trade associations and the DTI. This means no statutory regulatory powers for any of the accountancy trade associations.
3. An independent Ombudsman with powers to hear and investigate complaints should also accompany the ‘new body’. There would be no restrictions on the Ombudsman’s powers. Of course, the parties affected could still seek judicial reviews (if they can so afford) should they so wish.
4. The ‘new body’ would have an executive comprising members directly concerned with the interests of all those affected by audit, including consumers, creditors, shareholders and environmentalists.
5. The executive of the ‘new body’ should be nominated by the Secretary of state for Trade & Industry. The criteria according to which someone has been nominated shall be publicly declared. The DTI Select Committee shall have a right to examine, take evidence and/or scrutinise the appointment of any person to the ‘new body’.
6. The ‘new body’ would have audit practitioners on it. But they will neither be in majority nor in any significant numbers. Indeed, no stakeholder group should be in majority. This means that all issues would need to be negotiated by the various parties. They should be resolved on the basis of what is socially desirable rather than what some technical logic or in-built representation suggests.
7. There would be no seats for anyone directly representing any accountancy body (or any other organisation). The ‘new body’ needs input from audit practitioners. Therefore, it does not follow that they need to be the direct representatives of any particular accountancy trade association.
8. No member of the executive committee of the ‘new body’ shall be in full or part-time employment, or have any commercial interest in any organisation which is to be regulated by that body. No member of the executive committee shall hold office of any accountancy trade association during the term of his/her office with the ‘new body’.
9. All the proceedings of the ‘new body’ shall be in the ‘open’. Its minutes and agenda papers should be publicly available for a small subscription. The public and press must be able to attend, record, observe and report its meetings. Such processes will help the ‘new body’ to secure social legitimacy and will also make its ‘capture’ by vested interests difficult.
10. At the commencement of each meeting, each member of the ‘new body’ shall state whether the issues under consideration present any conflict of interests, and if so they should be publicly declared. Each member shall state that s/he has not reached any private agreement with any other member or any external party over the issues being discussed.
11. The ‘new body’ would be responsible for drawing up and revising audit regulations by establishing committees to undertake this work. Its members could be seconded from diverse constituencies (including accountants) to undertake this work.
12. The formulation of all rules and regulations shall be preceded by full consultation, inter alia discussion documents, draft documents, public hearings etc.
13. All the policies shall be made by the executive committee and be based upon a simple majority. Details of voting shall be appended to each document finalised by the body. Dissenting views and opinions, if any, shall be attached to any policy document issued by the ‘new body’.
14. The ‘new body’ shall specify the training and education aspects of auditors. The ‘new body’ shall have the powers to prescribe and revise recognised qualifications. These could be provided by established accountancy trade associations but not necessarily limited to these trade associations.
The body may wish to develop a new portable European wide qualification (e.g. say NCVQ Level 6 or 7) which would entitle its holders to work within Europe. A variety of organisations could offer this recognised qualification.
15. The ‘new body’ shall introduce regulations to safeguard and enhance auditor and insolvency practitioner independence. In common with many other external auditors (e.g. Inland Revenue, Customs & Excise, Health and Safety Executive, Factory inspectors, Environmental inspectors), financial auditors should not be permitted to act as consultants for their audit clients.
16. The body shall be responsible for monitoring all licensees. It will have powers to publicly name and shame firms with poor record Any firm criticised will be required to state the steps that it is taking to remedy the problems highlighted by the regulator.
17. The body shall have full statutory powers and resources to investigate the overall standards of any licensed firm to enable it to determine whether the firm is a ‘fit and proper’ to conduct external audits.
18. The ‘new body’ shall have adequate resources and rights to investigate matters of the public interest. These include incidences of real and/or alleged audit failures and abuses by insolvency practitioners. It shall have a statutory right of access to any document, record and notes to enable it to determine whether the firm is a fit and proper person. It shall also have a statutory right of information and explanation from any person involved with the conduct of the assignment under investigation. Anyone who knowingly or recklessly misleads the regulator shall be deemed to have committed a civil and/or criminal offence.
19. The body shall be able to suspend/withdraw licences and levy unlimited fines for non-compliance with its rules. It can also mount civil and criminal proceedings where necessary.
20. All investigations should be completed on a timely basis. Its annual report shall explain the reasons for any investigation which is not completed within 18 months of commencement.
The Secretary of State for Trade & Industry shall make a written and/or oral statement to the House of Commons explaining the reasons for the delay.
21. The body shall owe a ‘duty of care’ to all parties affected by its operations.
22. The ‘new body’ could be financed through a number of ways. Rather than the licensing fees being disbursed to the present five auditing and eight insolvency regulators, with their numerous overlapping structures, the fees would go solely to the ‘new body’. Sale of literature (e.g. auditing/insolvency regulation), donations, and contribution from general taxation and levies could supplement this. For example, the cost of filing the annual accounts and returns for major companies could be increased.
23. The ‘new body’ would be the responsibility of the DTI. Thus the Secretary of State for Trade & Industry would be answerable to Parliament for its activities.
24. The ‘new body’ should issue an annual report within 90 days of the year-end.
25. The DTI Select Committee should examine the operations of the ‘new
body’ at regular intervals and make suitable recommendations.