Accounting firms must improve their transparency and strengthen quality controls as part of efforts to restore confidence in financial reporting, according to a report commissioned by the profession’s global representative body.
It also recommends that accounting firms must be more willing to ditch high-risk clients and says audit partners should not be rewarded for selling lucrative non-audit services to companies. The report, titled Rebuilding Public Confidence In Financial Reporting, was compiled by a taskforce chaired by John Crow, a former governor of Canada’s central bank, and commissioned by the International Federation of Accountants (IFAC).
Confidence will only be restored following recent business scandals if everyone involved — from company directors through to auditors and analysts — is committed to fair financial reporting, says the task force.
Companies should have ethics codes that encourage staff to blow the whistle on illegal or bad behavior, and that shareholders should be told of any serious breaches.
The report also calls for codes of conduct for analysts, credit rating agencies, investment bankers and lawyers, which would impose duties on them regarding fair financial reporting.
But some of the task force’s toughest recommendations are directed at the accounting firms themselves. Even though they are private partnerships, the task force says the firms should provide financial information about their businesses, including the degree to which they depend on particular clients.
The report calls for greater attention to the “tone at the top” of the accounting firms.
“Attention means more than pious statements regarding the importance of quality,” it says. “It requires top management to take action that reflects this in areas such as income allocation, promotion of partners and other personnel, and the acceptance and retention of clients.”
Some of the country partnerships that make up the “big four” accounting firms are believed still to pay audit partners for selling non-audit services to clients. The task force says the practice should be ended as it could jeopardize partners’ independence.
Some audit failures happened after the accounting firm identified a client as high-risk but decided to retain it despite the concern.
The task force says audit firms must show greater skepticism and be prepared to ditch some existing clients and to not accept certain prospective ones.