Iain Winfield, Accountancy Age, Thursday 8 July 2010 at 00:45:00

FSA report contains the most significant criticisms of the audit professionin years

?A worr ying lack of scepticism.? That?s the description from the UK?sbiggest f inancial regulators of auditors working with banks.

The FSA is now proposing it should have more powers (it ironically calls them?incentives?) to deal with auditors who fail to behave appropriately. It isconcerned that auditors do not challenge management and have failed to payattention to ?indicators of management bias? and have failed to communicateproperly with the regulators at the FSA.

Published in a discussion paper out last week, the criticisms contained inthat repor t are probably the most significant of the audit profession in the UKof the last ten years. No longer can the view that auditors had a good crisisstand. The Financial Services Authority (FSA) and the Financial Repor tingCouncil (FRC) have shot it down.

But contrast the FSA comments with those in this week?s issue of Ian Powell,chairman of PwC.

He writes that the audit model can be improved but says the fundamentalproblem is about the scope of the audit. It would be of no surprise if those atthe FSA behind the recent repor t saw that self criticism as much too narrow andfailing to deal with behaviour that concerns the regulators.

The problem for auditors is one of perception and, in turn, the reality itcreates. The FSA?s star ting point is the belief that there is a lack ofscepticism and its asser tion will go a long way among many interest groups ?shareholders, business par tners, policy makers ? in determining how theyperceive auditors. In many senses auditors? reputations are now on the line. Asmuch as they may claim their work is of the highest standard there will alwaysbe that FSA paper out there which questions their ability to bring scepticism tobear in their work.

And this goes to the hear t of what it is to be an auditor, not just thescope of an audit. The FSA?s remarks will run deep. The question is what willthe profession do now?
</br>In some senses, if it continues talking just about the ?scope? of auditing itwill be denying the FSA?s criticism.

It could also lead to a failure to deal with the regulators? scepticismclaim. This could be dangerous for auditors who already accept that somethinghas to change in audit. It could be interpreted as a failure to come to termswith much deeper issues about the culture and mindset of the profession.

The FSA?s discussion paper is not just about the audit of banks, it is achallenge to the future of audit itself.