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PROFESSIONAL OVERSIGHT BOARD

REVIEW OF HOW ACCOUNTANTS SUPPORT THE NEEDS OF SMALL AND MEDIUM-SIZED

COMPANIES AND THEIR STAKEHOLDERS

UPDATE - DECEMBER 2007

Introduction

The Financial Reporting Council (FRC) aims to strengthen confidence in corporate reporting and governance.

One way in which the Professional Oversight Board (POB), an operating body of the FRC, contributes to this aim

is by seeking to increase the extent to which clients of professionally qualified accountants can rely on them to

act with integrity and competence.

In March 2006, the POB published the findings of its review of how professional accountants work with small

companies and medium-sized companies and their stakeholders. The POB decided to undertake the reviewhaving considered the overall importance of this sector and the significant changes made in recent years to the

financial accounting and reporting arrangements for these companies, including the significant take-up of audit

exemptions (see diagram below). The review focused on the extent to which directors of small companies and

users of their accounts rely on professionally qualified accountants to act with integrity and competence.

The review was based on research including surveys of the views of 600 companies and 1,250 accountants and

other business advisers. The POB met with around 25 small professional accountancy practices nominated by

the bodies, as well as members of the AAT, IFA, and the Institute of Certified Bookkeepers, and general business

advisers. In addition 350 sets of accounts of small and medium-sized companies filed at Companies House were

reviewed by the POB together with the professional accountancy bodies.

Annual accounts registered at Companies House by type, 2001-02 to 2005-06

0

200

400

600

800

1000

1200

1400

2001-02 2002-03 2003-04 2004-05 2005-06

Annualaccountsregistered

Audited

Not audited

Source: Department of Trade and Industry, Companies in 200506. Excludes dormant companies.

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Progress in implementing the recommendations

Clarifying the role of professional accountants tousers of unaudited accountsThe Review found that individuals and companies

who are considering doing, or are already doing,business with small companies whose accounts arenot audited are often unclear over the role ofprofessional accountants in the preparation of theseaccounts.

Very few sets of accounts on the public recordinclude a report describing the involvement of theaccountant. Although the professional accountancybodies provide guidelines to their members on acompilation service and the use of a compilationreport, the guidelines vary between the bodies.

Much of the content of these reports is in the formof negative statements which describe thelimitations of the work undertaken. Furthermore,some bodies have recommended that the reportsare not attached to the accounts sent to CompaniesHouse.

To help users of non-audited accounts, the POBrecommended that the bodies should work togetherto provide a clear explanation of the extent andrelevance of the involvement of professionalaccountants in the preparation of accounts. ThePOB suggested that this should be achievedthrough a cross-profession report for non-auditedaccounts that includes a very broad description ofthe scope of engagement of the professionalaccountant together with a positive description ofthe accountants professional obligations.

Under their codes of ethics, professionalaccountants are required not to be associated withaccounts where they believe the information tocontain a materially false or misleading statementor statements or information furnished recklessly.They are also required to maintain their

professional knowledge and skill at the levelrequired to ensure that clients receive competentprofessional service. These powerful statements, thePOB noted, could be more clearly communicated tohelp ensure they are recognised by directors andusers of their accounts.

The use of the cross-profession report for non-audited accounts would need to be supported bynew and more secure arrangements for reportingthe involvement of professional accountants whenaccounts are filed electronically at Companies

House.

The bodies, through the Consultative Committee ofAccountancy Bodies (CCAB), set up a workinggroup to consider a cross-profession report for non-

audited accounts. However, in consulting theirmembers, the bodies found concerns anduncertainty over the benefits that such a reportwould deliver to them or their clients. The POB willaccept invitations to participate in furtherdiscussions with the bodies and practitioners toexplore these issues and, in association with otherparts of the FRC, could, if helpful to the bodies,provide more direct guidance.

The POB considers that further work is needed to explainthe extent and relevance of the involvement of

professional accountants in non-audited accounts. Theprofession should not be over-cautious in explaining theeffort taken by its members as a matter of course to

provide competent professional services and to ensurethat accounts are of high quality.

The CCAB has also met several times withCompanies House and reports a good level ofagreement on the key areas needing development.However, since the POB report was published,electronic filing of accounts has been introduced ina way that shows no evidence of the involvement of

accountants. This compares to paper filing wherethe name of the accountant is often provided.

The POB considers that the CCAB should continue towork with Companies House to find a way of disclosingclearly on the public record the involvement of

professional accountants in the preparation of unauditedaccounts, including those filed electronically.

In September 2006, the ICAEW launched aconsultation exercise to explore the financialinformation requirements and assurance needs of

businesses that fall below the statutory auditthreshold. Alongside this, the ICAEW launched anew assurance service that chartered accountantscan offer clients who would like an independentreport on their annual accounts.

The POB notes that it is yet to be established whetherthere is a need for an assurance service in the gapbetween professional accountants standard accounts

preparation services and audit. Improved clarity over therole of professional accountants in the preparation ofnon-audited accounts is necessary before this can be fullyexplored.

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Ensuring that there is substance behind thedescription of the role of professional accountants

The Review found that a sizeable minority ofaccounts filed on paper at Companies House,

including those prepared with the involvement ofprofessional accountants, included technical issues,errors or other evidence of a lack of care inpreparation. The POB recommended that the bodiesshould take steps (including those they hadproposed) to help improve the quality of financialaccounts which have the involvement of theirmembers. The bodies were asked to report formallyto POB on the effectiveness of these steps in April2007.

The bodies have taken steps, including publicising

the problems, providing guidance to their membersand assessing the quality of accounts during qualitycontrol visits. Bodies reported that more time isneeded before they can measure the effectiveness ofthese steps.

To help ensure that there is substance behind theexplanation of the role of professional accountants, thePOB considers that the professional bodies shouldcontinue their work to improve the quality of accounts

prepared with their members input. The POB wouldexpect them to be able to measure the effectiveness of the

measures by Spring 2008.

Helping directors of small companies to assess theirneed for support from professional accountants

The Review found that some directors of smallcompanies were unclear over the options availableto them for their financial reporting and how theycan obtain help with it.

Following the introduction of audit exemption,directors of most small companies were now free tochoose different types of accountancy advisers.

Some directors did not know whether their adviserswere professional accountants or why this might beimportant. This may reflect a shortage of suitablyqualified bookkeepers, which can result inprofessional accountants carrying out routinerecord-keeping work for their clients.

Some company directors were filing abbreviatedaccounts at Companies House without a fullunderstanding of the commercial implications of

this choice. Many directors were also unclearwhether they are filing audited or unauditedaccounts. Some appeared not to be aware thatcertain user groups, particularly credit managers,may look for an audit and may be more cautious inthe absence of it.

Some directors appeared not to appreciate the valueof good financial information. These directors donot look for support in understanding orinterpreting financial information, often seeaccounting merely as a regulatory burden and maynot have good financial information to inform theirdecision making.

The POB recommended that the professional bodieswork together to explain the role of professionalaccountants to directors of small companies. ThePOB also recommended that the bodies should alsoexplain to directors their options in respect of filingabbreviated or full accounts, having the accountsaudited, and using accounting information toachieve good financial management.

The bodies drew attention to their publications and

other initiatives which provide these explanationsto directors of small companies. One suggested thatgeneral information campaigns of a scale necessaryto increase awareness amongst company directorsare beyond the combined budgets of theaccountancy bodies. Several bodies suggested thatstatutory recognition of the term accountantwould help directors to better understand the roleof professional accountants.

The POB considers that the bodies should workcollectively rather than individually to more effectively

provide information to help directors of small companiesassess their need for support from professionalaccountants.

The POB appreciates the work of the professional bodies in implementing the recommendations made in this Review.However, as set out in this project update, in our view further work is needed to help ensure that professionalaccountants are able to continue to meet the needs of directors of small companies and users of their accounts withintegrity and competence.