Lindsay Gardiner: Proposed audit changes risk further damaging industry

The auditing profession, like every part of the financial system, has to learn lessons from the recent financial crisis. Audit, and audit firms, must continue to develop to meet the changing needs of capital markets and to be ever more transparent and accountable.

This is an important debate and some aspects of the proposed reforms are to be welcomed, in particular measures that will promote high-quality audits and a dynamic and vibrant profession, and most importantly confidence in the financial information being reported to the markets.

Removing any artificial barriers to entry for smaller audit firms – such as legal covenants, which require the use of a large audit firm, for example – would be welcome, as would moves to promote greater audit committee transparency in selection of audit and non-audit services.

The creation of auditor European Union passports, which would improve the portability of auditing qualifications within the EU to increase mobility for suitably qualified professionals, is also an interesting one.

We would also be supportive of increased dialogue between the regulators and auditors which would simultaneously enhance the value of audit whilst addressing other concerns around independence and market structure.

As a firm, we will be supportive of all evidence-based legislative reforms that would enhance audit quality and remove any barriers, real or perceived, that might prevent the operation of a truly competitive audit market.

It is crucial that the focus of the debate remains on audit quality and building confidence in reported financial information, avoiding any superficially attractive proposals that could, in practice, have precisely the opposite effect.

In particular, the proposal to establish “audit only” firms would represent a very significant market intervention that, coupled with mandatory firm rotation, could severely disrupt services available to companies and undermine quality and confidence.

This issue, along with a number of other proposals that were included in the original commission green paper, do not reflect the opinions of many stakeholders who responded to that consultation.

In addition, many of these ideas were debated and rejected by the European Parliament in its own initiative report, which was adopted on 13 September.

The simple fact is: you do not solve any perceived lack of auditor independence by moving to “audit only” firms.

We believe this argument is flawed, but we also recognise that the perception of auditors lacking independence is one that we have not done enough to counter.

As a profession, we need to be more open about what it is that we do in terms of challenge and scepticism.

I believe all stakeholders would recognise that in the context of today’s fragile markets it is critical not only to avoid undermining confidence, but also the unwarranted additional costs that could arise.

We must, at all costs, avoid reform simply for reform’s sake, imposing any changes which could weaken the capital markets and dent audit quality. Changes must be informed, considered and measured.

If adopted, many of the proposed reform measures that are now being reported in the media, would, in my view, undermine our ability to deliver quality audits, seriously impact the attractiveness of the audit profession to future generations and are likely to have serious unintended consequences for business and the wider capital markets.

There are also other unintended consequences to consider for the UK economy. We live in a global workplace with a highly mobile workforce and if these proposals are carried through, then people may simply choose to work elsewhere in the world.

Accountancy firms in the UK attract highly-talented people because of the variation of work they offer and the ability to move easily around different parts of the firm and expand their knowledge.

• Lindsay Gardiner, head of assurance at PwC in Scotland