ICAEW Rejects New Audit Rules

by Robin Pilgrim, LawAndTax-News.com, London

12 October 2004

It emerged last week that the Institute of Chartered Accountants in England and Wales (ICAEW) has rejected new standards unveiled by the Auditing Practices Board (APB) which seek to prevent the same accounting firm preparing and auditing a company's accounts.

In a statement released last week, chairman of the ICAEW's Practice Society, Eric Kench argued that the APB's proposed ethics rules will impose an unreasonable burden on the UK's SME (small and medium-sized enterprises) sector.

"Small entities in the APB standards (defined as having not more than £5.6 million turnover) have some limited exemptions from the requirements. But we believe there is an unrecognised swathe of medium-sized entities between the £5.6 – £22.8 million level. They provide 10% of UK private sector employment and nearly 15% of turnover."

"The type of safeguards that ensure independent audits for smaller businesses apply to these entities as well. This dynamic and growth oriented sector will be unnecessarily affected by the new requirements particularly for owner managed businesses," Mr Kench suggested, going on to add that:

"Rigid economic dependency rules will restrict professional services firms from providing audit services to a number of their existing clients and rules on the provision on non-audit services will restrict their ability to represent them before the Inland Revenue."

"SMEs rely on their accountancy firms to provide independent advice on taxation as well as accountancy matters. We believe that these restrictions will place additional unnecessary burdens on small and medium sized businesses, forcing them to employ two different firms when they already face significant costs in compliance with regulation."

He predicted that the APB's requirements could lead to small firms dropping out of audit by claiming exemption, in order to address competitive pressures.

"That will lead to a reduction in the number of chartered accountants acting as registered auditors at a time when a contraction of the audit market is the last thing that businesses need," he observed.

The ICAEW's Council is set to meet again on December 1, at which point the adoption of the new ethics code will again be discussed, prior to the APB-set implementation deadline of December 15.

However, the Institute is reported to feel it likely that further discussions on the matter with the Auditing Practices Board will be necessary.

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