Accountancy Age, Accountancy Age, Thursday 7 October 2010 at 00:30:00

Some auditors are punching above their weight and falling short, so shouldauditors be licensed?

Small audit firms must have winced when the Financial Reporting Council?sinvestigation was published. It was scathing. So critical, in fact, of the waysmall firms handle the few plc audits they have, that the FRC revealed it wouldtell some auditors to cease their work with listed clients and would look for anew way to regulate them, including some form of license arrangement.

Our story on the issue this week reveals the reason why. Some auditors aretrying to punch above their weight and falling short, by some way. And thereason? More than likely they don?t do enough of those kind of audits to developthe kind of professional standards that are necessary. If you are only doing onea year, then how do you maintain and develop your expertise in the field? It?salways going to be tough. But it has also always been a part of the UK auditlandscape. Small firms have always retained some of the plc market, the listedcompanies, who have always returned to them ? some for decades at a time.

Ideally, regulators would like the auditors to show some self restraint, erron the side of good sense and turn down the big lucrative audit contracts whenthey come walking through the door. But, put that way, it does sound like a lotto ask, especially if you already believe the job is within your capabilities.And there?s the other problem ? what do you fill the revenue gap with? That?snot an easy question to answer.

Another solution, which would prove very convenient for regulators, is forthe smaller audit firm sector to go through a bout of consolidation. That wayexpertise and volume of work can be pooled. Once that happens, the capabilitiesare concentrated, the frequency of the work increases and standards are easierand more cost effective to maintain.

That sounds like a sensible route to take, but it hardly seems like somethingthe regulator can influence.

What the regulator has considered, as mentioned already, is some form oflicencing arrangement. Or to put it another way, a competency requirement list.That?s an interesting proposal but it sounds troublesome. Once you start doingthat you begin to encounter many of the objections that are used against movesto protect use of the term ?accountant?. You begin to close down access to themarket. Though this is a different matter ? it?s about statutory audit, not justaccounting.

The larger problem is that it would be unfair to impose such a regime onsmaller auditors without doing the same to the bigger players. If not, somefirms would face barriers to entry that others would simply side step by virtueof their scale. It?s entirely plausible that a large audit firm could be rubbishat auditing listed companies too.

The regulators will take the issue to the department for business fordiscussion with government officials. It will not escape their attention thatrestricting access to the audit market might look strange when there is stillmuch debate about concentration of the market among the big firms.