UK - Corporate governance experts believe new legislation may be needed to restore shareholder confidence in the wake of the Enron collapse.
Financial Services Authority (FSA) chief Howard Davies has already suggested that the FSA may limit the amount of non-audit work an auditor can undertake. The Treasury is also looking into the possibility of new financial regulation.
But fears are growing that share prices could be hit by a loss of confidence in quoted companies with auditors in both audit and non-audit roles. PIRC director Stuart Bell said: “If investors lose confidence in the integrity of the audit process, whether that is justified or not, that becomes a self fulfilling prophesy.”
PIRC, which advises a third of local authority schemes, has long recommended voting against the re-election of auditors who also perform large non-audit roles in quoted companies over fears of a conflict of interest. It recently recommended a vote against the re-election of auditors at Six Continents and Compass among others. Auditors at both companies currently earn two and a half times more in non-audit fees.
Clear evidence of a change came when the Co-operative Insurance Society (CIS) highlighted that Airtours’ auditor, Arthur Andersen, had its non-audit fees dramatically increased over the past year to £7.2m, dwarfing its audit fees of £1.2m.
CIS head of corporate governance Ian Jones said: “The danger is that if the relationship is too cosy, the policies and figures put forward by management are not necessarily challenged rigorously enough. There is also the danger of auditors backing down in a dispute, as there is the potential of losing £7m worth of non-audit business.”
The NAPF wrote to Airtours asking it to explain why Andersen’s non-audit fees had doubled over the year. Airtours explained that the increase was in part due to an e-commerce contract awarded following competitive tender.
By David Rowley
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