Last month I highlighted the deterioration in quality of company accounts on file, linking this phenomenon to the increase in number of companies exempt from audit.
Since the new Companies Act makes no attempt to address this issue the profession’s own Professional Oversight Board (POB) now strongly supports the view that the involvement of qualified accountants in the preparation of accounts should be encouraged, and that such involvement should be clarified and made explicit.
The POB’s own review of a sample of small company accounts showed that many accounts include elementary but material computational errors and inconsistencies which fundamentally undermine their usefulness and credibility. The POB’s concerns are, of course, shared by the major professional bodies, which have agreed to raise their members’ awareness of this appalling state of affairs, particularly since the substandard accounts were often prepared with the involvement of those members.
Since the substantial majority of all accounts now on public record are unaudited (and this number will increase if the exemption threshold is raised to £6.7 million turnover under EU limits) it is imperative that routine users should be given some “authentication benchmark” as to the reliance that they may legitimately place on those accounts. It took many years to orchestrate a measured transition from the old 3-line audit report to the pages of (largely unread) protective utterances that now effectively seek to pin final responsibility on the directors – but at least it has been successful in discouraging utterly spurious litigation against auditors. It has also bridged the former hiatus between uninformed public expectation and an appropriate measure of audit warranty.
While there is no equivalent measure for unaudited accounts the whole system of accounts filing is liable to be brought into disrepute, and the profession’s role in this disgraceful state of affairs will inevitably be called into serious question.
Given “compilation” formal recognition
The exercise described by the POB as a “compilation service”, whereby the dross of financial records (in whatever form) is transmuted into compliant accounts, should obviously be the subject of a clear self-standing statement followed by an opinion, however limited. Yet the staggering reality that emerges from the POB sample is that only 5 per cent of all unaudited accounts are accompanied by any form of compilation report.
Further, the CCAB bodies themselves, while acknowledging the need for such reports, have so far failed to agree on even the appropriate professional approach to such an assignment, let alone any outline work programme.
Is it not astonishing that, in the land of accountancy’s birth as a major profession over 100 years ago, its leaders still cannot agreed on what an accountant needs to do in order to avoid being associated with misleading accounts?
The problem is not technical, nor ever has been. The problem, as usual, is fear of setting a standard that will alienate members averse to any litigation risk. Yet history shows the very opposite: if an accountant sends financial statements to the client’s bank showing a figure for work in progress that is inexplicably 300 per cent higher than in the previous period, he is patently at risk by virtue of mere association – the absence of any form of accountant’s report will not help him, and this has been at the core of professional guidance for 50 years.
Nor, arguably, would a compilation report serve to rebut allegations of negligence. The real point is that users of accounts are entitled to know what the accountant’s role is, the processes by which that role is fulfilled and their conclusion.
A recognised, profession-wide formulation to cover compilation services is now overdue.