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Audit review group can help align standards to international best practice Back  
In addition to correcting misconceptions about the nature of the accounting profession, the work of the Review Group on Auditing can highlight the need to stay competitive in international financial services in Ireland, writes Peter Carroll.
Earlier this year, in line with the recommendation of the DIRT enquiry report, the T?naiste and Minister for Enterprise, Trade & Employment, Mary Harney decided to establish a review group on auditing. A group which is chaired by Senator Joe O’Toole was given the following terms of reference:

• Whether self-regulation in the auditing profession is working effectively and consistently
• Whether any new or revised structures and arrangements are necessary to improve public confidence and if so, what form should they take.

The group was also asked to examine and report on issues concerning the audit profession which was raised in the DIRT enquiry report. The specific issues raised by the PAC Committee included:

• Provision of non-audit services and the impact of other functions such as tax advice and consultancy on the external audit process.
• Possible role for the Central Bank in reviewing the management letters and reports issued by external auditors.
• Strengthening of auditing standards in relation to the audit of financial institutions.
• Appointment of joint auditors to financial institutions with one auditor being appointed by the Central Bank.
• Possible introduction of a maximum term of five years for an auditor to a financial institution.

The audit process and the accountancy profession has come in for some strong criticism recently. I believe that the Review Group is both timely and welcome as it has established a platform for debate on the audit process. Such a debate is necessary, as it is my belief that the audit process and the role of external auditor is misunderstood. It should in my opinion, be viewed as one part of an overall corporate governance environment which must also include regulators, non-executive directors and executive management.

Initially, there was a concern among the accounting profession that the review group could lead to an end of self-regulation for the profession. It is now widely accepted that such a move is unlikely.

International standards
In the wake of the DIRT enquiry, I believe that a view was formed by politicians, media and public that the accounting profession was run along the lines of an exclusive club run solely by its members. Such a view is harmful to the profession and the review group represents an opportunity to set the record straight in terms of how the profession regulates itself.

The truth is that the accounting profession does involve a significant representation from non-members in a number of important areas including standard setting, quality assurance and disciplinary proceedings.

While the debate is welcome, we must remain focussed in terms of what can be achieved. One important fact that must not be overlooked is that Ireland has established a significant international financial services sector. Ireland is recognised as a key location for businesses expanding internationally in the competitive IT and financial services sector, and there is a growing list of Irish managed companies who are raising capital in international markets either through the Nasdaq or most recently through the Neuer Markt.

We operate in a global market, where regulatory restrictions can and do influence the establishment of business projects. As pressure grows on the Irish economy to remain competitive, we should not put ourselves out of step with Europe or the US in the area of regulation.

ICAI proposals
The Institute of Chartered Accountants in Ireland (ICAI) has made a submission to the review group and has looked at developments in the regulation of financial services markets overseas, in particular in the UK. Proposals made by the Institute of Chartered Accountants in Ireland include the establishment of an oversight board to monitor the profession’s self-regulation, a call for statutory backing of its disciplinary procedures, together with the development of new guidance material for auditing of banks. The latter includes proposals regarding closer working between auditors and the Central Bank as regulator.

The audit approach adopted in Ireland to financial services industry and other businesses follows best international practice in many areas. The Irish profession has adopted the guidance and recommendations which have been established by the Auditing Practices Board, the International Auditing Practices Committee, and EU Committee on Auditing. Drawing on recent international developments, the ICAI in his submission has made a number of proposals to enhance the audit approach and address specific corporate governance matters.

Independent oversight
The most important recommendation, in terms of enhancing the existing system of self-regulation, is the establishment of a new independent oversight board along the lines of that which is currently working the US and has now recently been established in the UK. This board allows greater transparency and wider representation of public interest in the regulation of the accounting profession.

The ICAI in its submission has recommended that a practice note similar to that issued by the Financial Services Authority in the UK, be prepared for the audit of Irish banks. This guidance note includes a recommendation that regulators and external auditors work more closely together. It advises that:

• Regulators meet directly with the external auditor to review not only the management but also the findings of the audit.
• Banks should routinely commission reports on specific areas of risk and internal controls.

There is no doubt that the adoption of such a practice note would enhance the effectiveness of the audit process.

These proposals would ensure that the Irish financial services sector continues to operate to the highest international standards.

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