Knee-jerks bump auditing costs

By IRENE CHAPPLE

Auditors are attempting to steady the ship as companies get restless about overseas accounting scandals.

John Hagen, chairman of the Accounting Standards Review Board, is warning New Zealand businesses not to over-react to the waves of corporate fraud being uncovered in the United States.

This week Telecom - half owned by American shareholders - made a clean split between its auditing and consulting work.

Telecom's auditing work has been scooped from PricewaterhouseCoopers and given to KPMG, in a move largely seen as a calming pill for anxious foreign investors.

PwC will still be employed by Telecom to consult on tax and financial services.

It was not doing IT consulting for Telecom, the area frequently touted as most likely to jeopardise auditor independence.

The group - in line with other major accounting firms - has separated its IT consultancy into a independent business, being readied to list on the New York Stock Exchange next month.

The International Federation of Accountants' code of ethics says the provision of tax services to clients is "generally not seen to create threats to independence".

IT consultancy work is prohibited as it may "create a self-review threat" - ie, accountancy firms can end up auditing their own work.

The desire of Telecom for a squeaky clean image has been welcomed by some, but review board chairman Hagen is concerned that the action may prompt a copycat scurry of corporates.

"Just because [an auditor] does other work does not mean you are not independent," he said.

Hagen believes any non-audit work being accepted by an auditor needs to be ticked off by the client's audit committee, but he calls Telecom's move an over-reaction.

"I think the reaction to issues of auditor independence needs to be reasoned and principled, not just a knee-jerk reaction."

PricewaterhouseCoopers' leader assurance and business advisory, Warwick Hunt, does not believe other clients will follow Telecom's lead.

He points to the United States' Sarbanes Bill - likely to be the toughest legislation adopted globally in the wake of the financial scandals - which was approved in Congress this week.

It does not prevent auditors from working on the same client's tax work, unless it is on a contingency fee basis.

However Hunt, and others in the profession, accept that a decision to split the work will always lie with the client. "Every corporate is going to be different ... but what applies in America doesn't necessarily apply here," he says.

For varying reasons, a pure split between auditing and consulting is seen as likely to drive up the price of auditing.

One reason is a lack of competition, given that there are only four major accounting firms in New Zealand since Ernst & Young swallowed the troubled Andersen offices in March. Others say graduates, with a less diverse workload, will require higher pay packets and may be harder to retain.

The profession awaits a green paper on the issue which is being prepared by the Institute of Chartered Accountants. It is expected out early next month.