Last week, a British government oversight board announced that it is investigating services that a United Kingdom division of Deloitte and Touche provided to failed automaker MG Rover. The probe highlights differences between the regulation of non-audit services in the U.K. and the United States, and demonstrates how foreign auditors can be subject to the tougher U.S. restrictions.
The Accountancy Investigation and Discipline Board—which is the investigative and disciplinary body for accountants in the U.K., and is considered analogous to the U.S. Public Company Accounting Oversight Board—did not provide details of its investigation into Deloitte, other than to say it would examine audits of the 2003 accounts of MG Rover Group Limited and parent company Phoenix Venture Holdings Limited, as well as certain non-audit services provided by Deloitte.
Deloitte had described the MG Rover Group in October 2004 as a "going concern," meaning the auditor assumes that the entity would remain in existence for the foreseeable future. Just six months later, however, PricewaterhouseCoopers said the carmaker had debts of £1 billion ($1.8 billion) and few assets. The manufacturer’s subsequent collapse triggered the loss of 5,000 jobs.
Reports in the British press said that Deloitte had been paid £2 million (about $3.6 million) for “other services” on top of £500,000 (approximately $900,000) for auditing work in both 2002 and 2003. Another £1.1 million ($2 million) was paid to Deloitte in connection with the acquisition of Phoenix Venture Leasing 2 Ltd.
Deloitte, which issued a brief statement asserting that it had done nothing wrong and was “disappointed” by the investigation, had earlier revealed that the additional work supplied to Rover was corporate finance advice and due diligence work on the purchase of assets.
SOX Prohibitions
Despite efforts by the International Accounting Standards Board and others to push for global accounting standards, the regulation of non-audit services provided by accounting firms remains an area where the U.K. and U.S. do not see eye-to-eye, although the approaches do overlap.
Under the Sarbanes-Oxley Act, it is unlawful for a registered public accounting firm in the U.S. to provide certain non-audit services to an issuer contemporaneously with an audit, including:
Bookkeeping or other services related to the accounting records or financial statements of the audit client;
Financial information systems design and implementation;
Appraisal or valuation services, fairness opinions or contribution-in-kind reports;
Actuarial services;
Internal audit outsourcing services;
Management functions or human resources;
Broker or dealer, investment adviser, or investment banking services;
Legal services and expert services unrelated to the audit; or
Any other service that the Public Company Accounting Oversight Board determines to be impermissible.
Even before the adoption of SOX, many of these services had been prohibited by the Securities and Exchange Commission’s November 2000 independence standards. In 2003, the Commission issued rules implementing SOX that clarified the prohibited activity, expanding the definition of “expert services” so that it is not limited to an accountant’s role when serving in an advocacy capacity.
Under SOX and SEC rules, it is not illegal to provide other non-audit services if they are pre-approved by the audit committee, and that approval is disclosed to investors in periodic reports.
The SEC has so far declined to include tax services in the list of prohibited activity; however, the PCAOB recently issued its own rules limiting tax services that can be provided to audit clients. Those rules are subject to approval of the SEC, which is currently considering them.
British Focus On Safeguards
In the United Kingdom, accounting firms do not have free reign when it comes to non-audit services, but blanket prohibitions such as the ones in the U.S. do not exist.
Fearnley
“[Non-audit services] in the U.K. model derives its position from the U.K. independence framework, which considers threats and safeguards for independence," says Stella Fearnley, a professor at the University of Portsmouth Business School who serves part-time as a member of the U.K.’s Professional Oversight Board for Accountancy. "Prohibitions are only brought in where it is clear that no safeguard can protect against the threat.”
Accounting standards in the U.K. are set by the Accounting Standards Board, which—like the Accountancy Investigation and Discipline Board and the Professional Oversight Board for Accountancy—comes under the auspices of the Financial Reporting Council, the rough equivalent to the Securities and Exchange Commission.
There is also a regulatory body within the FRC called the Auditing Practice Board, which develops auditing and assurance services standards and is also responsible for setting ethical standards relating to the independence, objectivity and integrity of auditors.
It is this latter group, the APB, which in December 2004 issued a detailed pronouncement—"APB Ethical Standard 5"—providing “requirements and guidance on circumstances arising from the provision of non-audit services by audit firms to their audit clients, which may create threats to the auditors’ objectivity or perceived loss of independence.” Under the APB standards, safeguards can sometimes “eliminate the threat [of loss of independence] or reduce it to an acceptable level.” If that’s not possible, the auditor has to withdraw entirely or refrain from conducting the non-audit services.
RELATED EXCERPT
Below is the full text of Deloitte's statement on the investigation, as communicated to Compliance Week via email:
"We note the AIDB announcement and are disappointed in this decision. Following the initial consideration of this matter by the ICAEW Investigation Committee, that committee determined that it should be made abundantly plain to the AIDB that it has not found a prima facie case against Deloitte and this should be made clear in any communication issued. We will fully co-operate with the investigation; we are confident that we will demonstrate that our work was carried out to the highest professional standards.".
For example, the provision of legal services by auditors, something prohibited by SOX, is subject to restrictions in the U.K., but there is no general prohibition. Instead, the British standard says that an auditor “should not undertake an engagement to provide legal services to an audit client where this would involve acting as the solicitor formally nominated to represent the client in the resolution of a dispute or litigation which is material to the amounts to be included or the disclosures to be made in the financial statements.”
Fearnley tells Compliance Week that U.K. officials didn’t see the need for the severe prohibitions on non-audit services contained in SOX and SEC rules. “From a U.K. perspective, we have not had any earth-shattering scandals for a few years now, so excessive prohibitions are not needed to keep the politicians and public quiet,” she says. “[A]s to why we didn’t adopt the Sarbanes-Oxley provisions, give me one good reason—or even any reason—why we should adopt a U.S. solution to a U.S. market failure when we didn’t have one ourselves?”
Foreign Firms Impacted
Although non-audit rules in the U.K. and elsewhere may be less restrictive, foreign accounting firms are required to abide by the Commission’s tougher rules when they conduct audits of foreign subsidiaries and affiliates of U.S. issuers, and in certain other situations.
The Commission recognized that this creates potential problems when it issued its rules on auditor independence in 2003. The SEC said it was “mindful of the fact that this rule may overlap with foreign requirements designed to achieve auditor independence. The Commission has taken foreign requirements into account, and afforded accommodations to foreign accounting firms in a manner and to the extent consistent with the spirit and intent of the Act. As the rule is implemented, the Commission, as well as the PCAOB, will monitor its international impact and continue to dialogue with its foreign counterparts.”
A spokesman for the PCAOB tells Compliance Week that there is an “ongoing dialogue” concerning the impact of the U.S. non-audit restrictions on foreign auditors but notes that no specific report or analysis is anticipated anytime in the foreseeable future.
Fearnley, of the U.K.’s Oversight Board, is critical of the international reach of the SOX prohibitions on non-auditor services. “[T]here are quite a few people in the U.K. and other parts of Europe who object very strongly to the extra-territorial provisions in the Sarbanes-Oxley Act, as there is an underlying presumption that other countries don’t know how to regulate their own,” she says. “This, of course, is nonsense.”
She also suggests that efforts to impose universal accounting standards may have an uphill climb.
“The global agenda is not without its problems and I do not believe we can ever achieve true global convergence—nor [do] we really need it,” she says. “As long as it is possible to understand what is happening in key markets, what more do we need? We can make things look the same, but they may not be the same."
According to Fearnley, cost is an issue. "The cost to all businesses of making it all the same for the sake of a relatively small number of very large companies and the Big Four accounting firms is likely to be excessive." She adds that the markets should and will drive practices. "Markets already find their own level and will to do so regardless of the accounting and auditing convergence plans. Level playing fields are really a regulator’s pipe dream and common standards are very nice for the Big Four. But what about everyone else?”
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