30 January 2003 | David Arminas
A major government-backed report on corporate accountancy has left the door open for purchasers to be more involved in auditor appointments.
The report recommends that a company set up an audit committee that includes three non-executive directors to appoint auditors, examine their performance and consider "whether the skills and experience of the audit firm make it a suitable supplier of non-audit services".
The report by Sir Robert Smith, chairman of the Weir Group, recommends to the Financial Reporting Council (FRC) that the committee annually assess the qualification, resources and independence of the auditor, as well as agree fees.
Roy Ayliffe, director of professional practice at CIPS, welcomed the recommendations, even though the report stopped short of requiring purchasers be on the audit committee.
He told SM: "It moves in the right direction and creates a strong argument for purchasers with their knowledge of supplier evaluation processes to be part of the audit committee."
Last August, Ayliffe wrote to Patricia Hewitt, secretary of state for trade and industry, on behalf of CIPS, setting out the argument for including purchasers in any moves to revamp the way auditors are chosen to avoid Enron-style financial collapse.
Peter Parry, a director of Sterling Consultancy Group, said Smith's report was "a bit wishy-washy" because it did not exclude auditors from consultancy work, which could affect the auditor's independence.
"There will always be auditors who will try to take advantage of their audit work to get consultancy work," Parry said.
The report also does not favour compulsory rotation of auditors after several years. Smith argued that accountants could lose interest knowing that they would not be re-appointed.
The Smith report was published at the same time as the Higgs report by former banker Derek Higgs. It recommends that half of board members be non-executive directors, up from the current third. There should be more non-executive directors from outside the corporate world.
Both the Smith and Higgs reports are up for consultation until April, when the FRC, responsible for the best-practice code on corporate governance, decides on a final version for adoption in July.