POB calls for more checks and balances on small accountancy firms

An oversight body has called for additional licensing and competency requirements to be imposed on small accountancy firms wanting to audit large public companies after a report revealed that in most cases the quality of their work was "poor".
 
The report, based on the findings of probes by the Audit Inspection Unit (AIU) over the last fiscal year, found that eight of the 11 small companies investigated were required to make "significant improvements" to their work, especially when gathering evidence to support the material balances reported in financial statements.
 
The study, which was published by the Professional Oversight Board (POB), part of the Financial Reporting Council, also revealed that, while the audits of investment trusts were "good" or at least "acceptable", more complex audits, particularly those relating to multi-nationals, were not.
 
The report is likely to come as a blow to smaller firms hoping to compete with the ‘Big Four’ dominant players, amid growing competition in the auditing market.
 
Dame Barbara Mills, the POB’s chair, said: “The number of smaller firm audits assessed by the AIU as requiring significant improvements is of concern. Smaller firms should take more care to ensure that they undertake audits of listed and major public interest entities only if they have the level of resources and expertise appropriate to the complexity of the audit concerned.”
 
The Audit Registration Committee had already taken action to restrict some small firms from auditing any further listed and AIM-registered companies, but consideration should also be given to "establishing specific competency requirements for auditors of listed and major public interest entities", she added.
 
Vernon Soare, executive director of professional standards at the Institute of Chartered Accountants in England and Wales, said in a letter to the POB that the body would take its recommendations into account when reviewing the work of small companies itself.
 
He added that the organisation had reassessed the way that it voluntarily monitored small firms over the last year and would include them in its planning for a second cycle of visits due to start in 2012.
 
But Vernon also expressed concern that the POB’s review did not cover the accountancy work undertaken by individuals who were not members of any professional body and had not evaluated "the risk to the public arising from the fact that the term ‘accountant’ is not legally defined and protected".
 
The study likewise failed to recognise that, in calling for increased oversight of firms that were already part of a review scheme, it further eroded the concept of a level playing field. This was because, although small firms would incur extra costs, individuals that were not subject to any regulation or oversight would not, Vernon said.