By Austin Slattery, President, Chartered Accountants Ireland
The recent closure of a long established stockbroking firm in Dublin has once again prompted comment about the role of auditors, not just in this instance but in respect of the financial crisis generally. Some commentators have understandably looked for the source of accountability in our profession and asked who is carrying out formal inquiry into the role of auditors in such cases. There is not a good understanding of how auditors are supervised and disciplined in cases of misconduct or negligence. Even less appreciated is the fact that there is unanimous agreement on how the system could be improved significantly. Because of our frustration with the planned pace of implementation I want to take this opportunity, on behalf of our members, to urge a faster delivery of an exchequer neutral scheme that will be a big plus for Ireland internationally.
The current model of supervision established in Ireland is one where a public body, the Irish Auditing and Accounting Supervisory Authority (‘IAASA’) oversees how the professional accountancy bodies (of which there are nine recognised in the State) exercise supervision of their members, including inspecting audit firms and audit work, as well as investigation of complaints and disciplining where appropriate. Simply put, it is a model of State supervised regulation but not direct regulation.
It may surprise readers that there is unanimous agreement on how the system can be significantly improved as it relates to “public interest entities” (essentially listed companies and certain financial institutions). In line with international best practice, quality assurance and supervision of auditors of public interest entities should move away from the professional bodies in favour of IAASA, the State regulator. This is the model that is present in a number of countries from which Ireland sources international capital and CAI believes that implementing this model will make Ireland an even more attractive place in which to locate this capital.
For example, for a number of years now, monitoring and inspection of the large audit firms in the UK has been performed by the Financial Reporting Council’s Audit Inspection Unit. This system operates in a manner that is completely independent of the audit profession. What may also surprise readers is that there is also policy support for this measure among wide range of stakeholders including the Department of Jobs, Enterprise, and Innovation, Chartered Accountants Ireland, the audit firms, IAASA and regulators. It is most likely that the any incremental cost of this initiative (when compared to the current supervised regulation) will be borne by those directly impacted - audit firms and their clients - and so will be neutral in Exchequer terms. Before it left office, the previous government had already announced that it was moving to implement this sensible policy.
One would think that implementing an idea that would significantly boost public and international confidence in a way that is exchequer neutral should be a priority for action. For Chartered Accountants Ireland, the progress to implementation has been lamentably slow. We want to see it pick up pace significantly because on current forecasts it could take years. Possible reasons for the slow delivery are the inflexibility of the public sector recruitment embargo and a possible need for additional legislation.
At a time when Ireland needs to be putting its best foot forward internationally, we urge that the Minister needs to give a fresh impetus to implementing what is already settled as a better model for Ireland at no cost to the taxpayer.
Without delaying the implementation, Chartered Accountants Ireland also believes that the Minister should go further and also ensure that IAASA takes control and responsibility for the conduct of investigations into possible auditor misconduct and for discipline in cases of ‘public concern’. This model of supervision is also very much in line with international best practice.
For example the investigation into the conduct of accountants and auditors associated with Anglo Irish Bank could have been conducted by IAASA under its existing powers. The Board of IAASA includes among its membership representation from the Office of the Director of Corporate Enforcement, as well as the Central Bank of Ireland. Such expertise would have been well placed to conduct such an inquiry.
In this case, it has been carried out under the existing mechanisms created by our Institute. The Chartered Accountants Regulatory Board (‘CARB’), is an independent entity established by the Institute some years ago to assume responsibility for the Institute’s regulatory functions. In the aftermath of the collapse of Anglo it moved quickly to appoint a ‘special investigator’, former Comptroller & Auditor General, Mr John Purcell, to investigate the conduct of four members of the Institute regarding certain matters relating to Anglo Irish Bank. Mr Purcell’s report was finalised in 2010. His conclusion was that there existed certain prima facie cases that those members of the Institute could face disciplinary action under our Bye-laws.
The next stage of the CARB process would have been to move to hold disciplinary hearings, normally in public, during the first half of 2011. This process has been postponed as a result of a request from the DPP who expressed concerns that holding public hearings with subsequent publication might prejudice any further proceedings that may be taken by that office. Mr Purcell also conducted investigations in to the then auditors of Anglo Irish Bank. In a similar manner, the DPP has also requested that any hearings before a Disciplinary Tribunal be postponed.
CARB is also undertaking a review of the role of auditors to institutions covered by the Government’s guarantee scheme. The outcome of this is expected soon. There have been other, more general inquiries, undertaken into the role of auditors in the financial collapse. In his report into the causes of the crisis published in March 2011, Professor Peter Nyberg concluded that while the auditors of Irish banks fulfilled their statutory role, he commented that such a role was now unduly narrow to meet the present day needs of society. He commented also that the problem of clean audit opinions on financial institutions, only to be followed shortly thereafter by the threat of closure was not new, nor was it just an Irish phenomenon.
Chartered Accountants Ireland has not adopted this position on the regulation of auditors because we no longer have faith in our own processes. Far from it. Rather, such a move is an essential measure to restoring the confidence of the general public and other stakeholders in the role of audit and auditors both at home and internationally. Because of the slow pace of delivery, this issue is in need of the Minister’s urgent attention. Implementation needs to be speeded up and, if necessary, we need to legislate for any minor changes that are required.
A summary of this article was published in The Sunday Business Post Sunday 5th June.