In brief

Audit committees ‘blind to off-balance sheet practises’

Audit committees do not know what they’re doing when it comes to off-balance sheet accounting, one industry figure believes.

Speaking to Accountancy Age Peter Montagnon, director of investment affairs at the Association of British Insurers, said: “Investors frequently tell me that they [audit committees] don’t know enough about what is going on.

“This relates to the committees’ knowledge and also the accounting standards and what has to be reported.”

He added that committees needed to be up to speed with what was going on in a company and how things are being reported.

Earlier this month the Financial Times reported that the International Accounting Standards Board was looking into ways to reduce off-balance sheet accounting practises.

Such methods were also criticised by the Financial Services Authority (FSA) last year.

Hector Sants, head of the FSA, told the Treasury committee the fact that companies used such practises made it difficult to police UK financial systems.

Firms and public bodies ‘must cooperate’

Business leaders have been called on to engage in public-private partnerships to help boost sustainable economic growth and development.

The initiative is led by fourteen chief executive officers and chairmen of global companies who, on Friday, signed a statement aimed at getting their peers to engage with governments and other public bodies in order to strengthen public policies.

John Connolly, global chairman of Deloitte, said: “Public governance is a global issue. No longer can businesses, governments, or non-governmental organisations afford to act independently of each other. The stakes are just too high.”

He added that a combined effort was needed to achieve economic growth and sustainability.

Among the others who signed the statement were James Turley of Ernst and Young, Michael Wareing of KPMG and Bill Gates of Microsoft.

The agreement was announced at the end of the latest meeting of the World Economic Forum in Davos, Switzerland.

The forum was founded in 1971 as the European Management Forum but, as it expanded, changed its name in 1987.

Northern Rock failure raises auditing questions

The fallout from the run on the failed bank Northern Rock looks set to raise further questions on the manner in which financial institutions are audited.

Discussing the role of PricewaterhouseCoopers (PwC) the Treasury committee said that auditors were only able to provide “a snapshot of the past state of [a] company” when compiling a report.

Because of this, the committee said, accounting bodies should “consider what further assurance auditors should give to shareholders in respect of the risk management processes of a company”.

This would be particularly important for companies that were “outliers”, the report added.

It also suggested that there was a conflict of interest between the role of an auditor and other work it might do for a financial institution. The report gave the example of PwC having received £700,000 from Northern Rock in connection with the latter’s raising of finance.

There was no suggestion that PwC had acted improperly.

In its conclusion the report urged the Financial Services Authority to consider such potential conflicts as a matter of urgency.

Savers at Northern Rock formed queues to withdraw their money after it was revealed the bank had taken out emergency loans from the Bank of England, sparking fears of a collapse.

Auditors to probe deeper

Auditors will look to apply greater levels of scrutiny to companies in the wake of the credit crunch.

The UK Financial Times reports that uncertainty in the business world will mean that those carrying out audits will have to ask more searching questions than in previous years.

Martyn Jones, UK national audit technical partner at Deloitte, told the paper: “Many of the normal assumptions can’t be taken for granted so while we always tested them, this year needs particularly high levels of challenges, we are in a new world.”

However, figures released by Experian seem to indicate that, so far, UK companies are coping with the credit crunch.

According to Experian the number of businesses failing dropped by 8.9 per cent in 2007 when compared to last year.

It said that just nine of the 34 sectors they monitor had seen an increase in business failures.

GAO ‘over confident’

The recent study by the US Government Accountability Office (GAO) into the dominance of the big four accounting firms gave a misplaced sense of confidence, one expert believes.

Writing in the Financial Times Paul Boyle, chief executive of the Financial Reporting Council said that the GAO report had failed to consider the possibility that one of the big four firms might withdraw from the market.

Mr Boyle admitted that this was unlikely, but if it did happen large companies could struggle to find an auditor.

He also said that the GAO had failed to look at the wider picture and the reliance it had placed on the ability of regulatory authorities to cope with the loss of a big firm was - at least in the UK - “not well-founded”.

According to Mr Boyle “there is a need to improve the resilience of the market rather than relying on regulators to ride to the rescue”.

The GAO aims to support the US congress in meeting its constitutional responsibilities.