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Comments from ACCA
March 2005

The Association of Chartered Certified Accountants (ACCA) is pleased to comment on the Department’s consultation on the above. We welcome the proposal to require large companies to disclose more and better information about the fees paid to auditors for audit and non-audit services. Our own research in this area has shown that many large companies do provide information additional to that which is required by law, although the way they do this, and the amount of information they disclose, varies considerably. While the exact benefits are difficult to quantify, we believe it is arguable that investors could benefit from access to more detailed and standardized information about fees paid for non-audit services. The potential benefits to stakeholders are not, furthermore, likely to come at any material cost to companies and their auditors.

In saying this, we consider that the provision to audit clients of additional services is not, necessarily, a cause for concern as regards the auditor’s independence vis-à-vis the client company. We believe that, provided adequate safeguards are put in place, as they are required to be by ethical standards, auditors should be able to ensure that any additional work they carry out for a client company does not compromise their overriding responsibility to conduct an objective and independent audit.

Our comments on the specific consultation questions are set out below.

Q1. Do you envisage any difficulties that may arise in complying with any aspect of the definition of associates of a company’s auditors as set out in the draft regulations?

We do not believe that there would be any practical difficulties, in terms of ensuring that the required information was accumulated and disclosed. But we consider that the inclusion within the definition of ‘associate’ of any partnership, LLP or limited company which has a partner, member or director in common with the audit firm is too wide. The definition would encompass ventures in which the audit firm partner, member or director did not have the personal authority to commit that other firm. In the case of a limited company or an LLP, the common director or member would, in any case, have to declare an interest in any discussion of dealings with the auditee company and take no part in the firm’s deliberations on the matter. In the circumstances, therefore, we do not think it reasonable to set the definition of ‘associate’ so widely. It would be sufficient, in our view, to stipulate that the term ‘associate’ is to encompass other entities which are controlled either by the audit firm or by any partner, member or director of the audit firm.

For clarification purposes, we would however propose that the global figure for non-audit services, required by draft regulation 4(b), should be expressly linked to the services for which separate disclosure is to be made under draft Schedule 3. This is to ensure that the remuneration to be disclosed in the global figure is the same as that to be broken down under regulation 4(3).

Q2. Should joint ventures and other associates be included in disclosures?

We believe that the wording of draft schedule 2 is sufficient as regards joint ventures.

Q3. Should the definition of pension schemes which are associates of a company include those where the company or a subsidiary of the company are a trustee of the pension scheme?

We consider that one perhaps unintended consequence of the above would be that it could bring within the definition of associate group schemes, which would not ordinarily be regarded as being ‘associate’ to the company. While companies could get around the problem by refraining from acting as trustees of the scheme, this may not always be desirable. We would prefer the definition to remain as set out in draft schedule 2.

Q4. Should there be a “de minimis” exemption? If so what, at what level and by what criteria should it be set e.g. an actual monetary amount, or a percentage of total spend?

The draft regulations would require the disclosure of twelve different categories of information. This could lead in many cases to the disclosure of immaterial amounts which would be unlikely to provide useful information to readers. We suggest that disclosure of information by category should be subject to a disclosure threshold. The regulations could provide that information by category should be provided where the proportion of income received by the audit firm and its associates exceeded a set proportion of the global figure for non-audit services. We suggest that a meaningful level for that threshold would be 30% of the whole. This would be in addition to the disclosure of a global figure for non-audit fees, as provided for in draft regulation 4(b).

Q5. Do you envisage any difficulties, including unintended consequences, arising from the proposed categories and sub-categories, which broadly follow the approach adopted by the May 2002 EC Recommendation?

No.

Q6. Do you believe the inclusion of narrative explanations would add value for investors and shareholders?

Companies should be free to provide narrative explanations of the figures disclosed but this should not be required.

Q7. We would welcome your views on the cost and difficulties for companies that also need to follow US SEC requirement, and for users of that information.

We do not consider that the proposed disclosures will add materially to the existing burdens of those companies.

8. We would welcome your views on the difficulties for users of financial statements in the event that our approach and the SEC approach are not completely aligned.

We foresee only minor difficulties regarding potential duplication of similar disclosures.

Q9. At what level do you believe disclosure should be made (individual company or group accounts) and why?

Group accounts should be the standard vehicle for reporting, as there is likely to be little interest in disclosure in the case of subsidiaries.

Q10. Where in your view, should disclosure be made: in the notes to the company's accounts or elsewhere, and what costs or benefits might arise as a result?

Disclosure should be made in the notes to the accounts, so as to bring them within the scope of the auditors' opinion.

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