Comment/Peter Carroll: Self-regulation is often put forward as the most appropriate means of regulating various professions and industries.
And self-regulation does have a role to play. But the public may be forgiven for its antipathy towards it when faced with the constant stream of scandals and irregularities in banking, industry and the professions.
There are plenty of well-known examples of these, both nationally and internationally.
And, while the markets and the investment community have not yet reacted negatively to the most recent disclosures here at home, internationally the result, for the accountancy profession at least, is the end of self-regulation as we know it.
While much has happened in the area of corporate governance and voluntary initiatives, government-sponsored initiatives and legislation are encroaching more and more on how we do business.
At home, the various sections of the Companies (Auditing and Accounting) Act, 2003 ("the Act") have resulted in considerable new obligations being placed on companies and their directors. This includes the introduction of a Directors' Compliance Statement forcing directors of relevant companies to accept responsibility for ensuring that their company is in compliance with its obligations.
We have also had the introduction of the Director of Corporate Enforcement, charged with enforcing compliance with the requirements of the Companies Acts.
In 2003, the director received more than 3,000 regulatory issues or cases of possible corporate misconduct with decisions made on more than 2,000 of these and, in relation to reviewing the conduct of directors in insolvent companies, more than 150 directors have been restricted.
Specifically regarding the accountancy profession, the Act establishes the Irish Auditing and Accountancy Supervisory Authority (IAASA), which is charged with the supervision of the accounting profession's regulation of its members, the promotion of high professional standards within the accounting profession and advising the Minister for Enterprise, Trade and Employment on auditing and accounting issues.
IAASA's board will be made up of 14 directors, of which only four may be members of prescribed accountancy bodies. The remainder will consist of ministerial appointments and appointments from specific bodies including the Director of Corporate Enforcement, IBEC, ICTU and the Revenue Commissioners. The establishment of IAASA marks the end of self-regulation of the accountancy profession in Ireland.
While IAASA is one nail in the coffin of self-regulation, the Sarbanes-Oxley Act of 2002 firmly seals the lid. Among other things, Sarbanes-Oxley establishes a five-member Public Company Accounting Oversight Board (PCAOB) appointed by the Securities & Exchange Commission. PCAOB (or Peek-A-Bo as it has become known) has the authority to set standards regarding auditing, quality control, ethics and independence, and the power to fine and discipline auditors. Similar bodies are also being established in many other jurisdictions.
The Sarbanes-Oxley Act prohibits accounting firms, including Irish firms, which are not registered with PCAOB from preparing or issuing audit reports on US public companies and from participating in such audits. As part of its remit, PCAOB will require annual quality reviews of larger accounting firms and every three years for smaller firms. As a result of legislative issues between the EU and the US, PCAOB will delegate the regulation of non-US firms' compliance with the provisions of the Sarbanes-Oxley Act to a non-US regulator, which in Ireland will be IAASA.
PCAOB has already restricted the consulting and non-auditing services that auditors may perform, including bookkeeping, information systems design, valuation, internal audit, actuarial, investment and legal and expert services.
Allied to this restriction, the Sarbanes-Oxley Act requires the companies audit committee to take direct responsibility for the appointment, remuneration, retention and oversight of the work of the auditor in all areas of their work.
As a result, non-executive directors are separating the services previously provided by their auditors and are turning to second-channel advisers to provide non-auditing services to the company.
In an Irish context, industry sources estimate that this lucrative market amounts to about €40 million to be shared among the six or seven largest local accounting firms.
Although EU regulation regarding auditor independence is currently not as restrictive as US regulation, given the global environment in which we operate, it is only a matter of time before the auditor only completes the statutory audit of the company. Self-regulation is dead, let's get on with doing business.
Peter Carroll is partner in charge of business assurance at BDO Simpson Xavier
