USA PO6 urge improvements in the quality of financial reporting The Public Oversight Board (POB) is an inde- pendent body in the USA which is charged with overseeing and monitor- ing the quality control programs of public ac- counting firms that audit publicly held companies.

It set up an Advisory Panel in 1994 on auditor independence and a ma- jor topic in the Panel’s report deals with strengthening the rela- tionship between the board of directors and the independent auditor to help directors meet their governance respon- sibilities and improve the quality of financial statements.

The central sugges- tion of the Panel is that corporate boards and audit committees should expect to receive and independent auditors

should deliver forth- right, candid, oral re- ports in a timely manner on the quality - not just acceptability - of a company’s financial reporting.

The POB urges the board of directors to re- cognize its responsibility as the shareholders’ re- presentative to monitor the company’s perfor- mance. That accountabil- ity is discharged, in part, by ensuring that share- holders receive relevant and reliable information about the company’s per- formance and financial position.

For years, auditing- standards have required the auditor to judge

whether the accounting principles selected by management are “ap- propriate in the circum- stances”. The standard to which the auditor has been held in making that judgement has been whether the se- lected principle falls within the range of acceptable practice.

The POB endorses its Advisory Panel’s sugges- tion that the auditor should now be held to a higher standard in com- municating with manage- ment and the board of directors. This will re- quire the auditor to ex- press views about the appropriateness, not just the acceptability, of the

accounting principles and financial disclosure practices used or pro- posed to be adopted by the company. The audi- tor should comment on the degree of aggressive- ness or conservatism of the accounting principles and underlying estimates and the relevance and reliability of the resulting information for invest- ment, credit and similar decisions.

The change in focus proposed would empha- sise the quality of the end product of the reporting process and its relevance to corporate governance, rather than concentrat- ing on the measurement of compliance with stan- dard accounting and re- porting procedures.

David Bentley

HA - UK Calls For a Wider Definition of Internal Control The Institute of Internal Auditors - UK (IL4 - UK) has restated its opinion that it is wrong to distinguish be- tween financial and op- erational controls, believing that companies should report on their entire system of internal control, as originally in- tended by Cadbury. The Institute has published a new Professional Briefing Note (PBN), entitled Re- porting on Internal Con- trol. The publication is intended to equip inter- nal auditors to advise

managers, boards and audit committees on the implications of internal control reporting in its widest sense. It also pro- vides practical guidance for directors, senior man- agement, accountants and external auditors.

Listed companies in the UK complying fully with the Cadbury Code of Best Practice would be expected to publish their directors’ report on inter- nal control. Guidance for directors is contained within Internal Control

and Financial Reporting (known as the Rutteman Report) but this suggests as a minimum that com- panies should report on internal financial control only. IL4 - UK argues that it is artificial to attempt to distinguish between financial and operational controls since the failure of both can lead to the unauthorized use or dis- position of assets.

The new Professional Briefing Note provides guidance on the form, content and develop-

ment of Directors’ inter- nal control reports. It also deals with broader sub- jects relevant to a Code of Business Conduct, in- cluding conflicts of inter- est, confidentiality, relationships with suppli- ers, political activities, conduct towards employ- ees, community and cus- tomer relations and product quality.

David Bentley

Copies of the report are available from IIA- UK; Tel: f 44 (0) I71 498 0101; priced A7.50.

l q Computer Audit Update l April 1996 cj 1996, Elsevier Science Ltd.