Wham! new independent research reveals good news and bad news about UK financial reporting

After the Enron debacle of 2001, UK companies and their auditors were hit by an avalanche of regulatory change surrounding financial reporting, auditing, corporate governance and enforcement. The changes enhanced the role of the UK Financial Reporting Council in a number of ways. Responsibility for the Auditing Practices Board was transferred to the FRC and its remit widened to include the setting of auditors’ ethical standards in addition to auditing standards. The Professional Oversight Board was set up under the FRC with a mandate to inspect public interest audits via the newly formed Audit Inspection Unit (AIU) and publish findings. The Financial Reporting Review Panel (FRRP) became proactive in reviewing public interest accounts. The UK Corporate Governance Code enhanced the role of the audit committee, particularly in relation to its interactions with auditors. In addition, for December 2005 year ends, UK-listed companies were required by EU regulation to prepare their group accounts under International Financial Reporting Standards (IFRS) and at the same time the APB decided to adopt International Standards on Auditing (ISAs). How did this impact on the way directors and auditors of UK domestically-listed companies interacted with each other to reach key financial reporting decisions? Our study, conducted between 2007-2008, surveyed finance directors, audit committee chairs and audit engagement partners. With the help of the 100 Group of Finance Directors and the 11 largest audit firms, we obtained 498 survey responses – a 36% overall response. We persuaded nine companies – representing a range of industry sectors, company sizes and audit firms (Big 4 and non-Big 4) – to tell us how the interaction and decision-making process actually worked between them. We eventually carried out 26 interviews as, at a late stage, one audit committee chair withdrew.