University of Glamorgan

Business School

International Accounting & Audit

15 November 2007

THE OVERSIGHT OF THE AUDIT PROFESSION

- Supervising a Supervisor -

By Ecaterina Volosin

Table of Contents

1. EXECUTIVE SUMMARY 3

2. INTRODUCTION 4

3. THE AUDIT OVERSIGHT 5

3.1 OVERSIGHT SYSTEM IN THE US 5

3.2 OVERSIGHT SYSTEM IN THE UK 7

3.3 OVERSIGHT SYSTEM IN GERMANY 8

3.4 COMPARISON OF THE US, UK AND GERMAN SYSTEMS 9

4. EVALUATION 10

5. CONCLUSION 12

6. BIBLIOGRAPHY 14

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1. Executive Summary

This paper provides an overview of the current regulatory frameworks for financial reporting

and auditing in the UK, US and Germany. During the last years these frameworks were

noticeably changed. These changes arose especially from political interest in accounting

regulation following the Enron collapse. The main change in the US was the introduction of

the Sarbanes-Oxley Act containing strict regulations for auditors, including their

responsibilities and services. It also contains a list of prohibited audit activities, the so-called

"non-audit" services. The main feature of the Act was the creation of an oversight board to

regulate and control auditors of public companies. Thus the "Public Company Accounting

Oversight Board" was established. The PCAOB is a private-sector non-profit overseer,

supervised by the US Securities Exchange Commission (SEC) which regulates basically

anything related to the securities market.

Following the collapse of Enron and the turbulence in the UK markets that followed, a review

of financial regulation in the UK was ordered, covering for example auditor independence,

corporate governance, financial reporting and auditing standards and accountability of audit

firms. In order to restore credibility in UK accounting the Financial Reporting Council (FRC),

an independent private sector body funded by the accountancy profession, was set up. The

FRC has several subsidiary bodies, including the Professional Oversight Board (POB)

providing independent oversight of the regulation of the auditing profession.

The German Auditor Oversight Commission (AOC) was established according to the Auditor

Oversight Law. It is in charge of the public oversight of all activities of the German Chamber

of Public Accountants (WPK) with respect to statutory auditors. The Commission has the

ultimate responsibility in the areas of licensing, registration, disciplinary investigations and

quality assurance, all with respect to members of WPK entitled to provide statutory audit

services (WPK, n.d.).

It is argued that these new regulations impose another layer of bureaucracy with significant

costs for very little apparent gain. But ethical issues surrounding the public′s perception of

auditor performance need to be addressed, not just for the sake of the profession, but for the

efficiency and effectiveness of capital markets in general (Malthus and Scoble, 2005).

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2. Introduction

Over the years the accounting profession has been subject to various forms of oversight with

varying degrees of success. Nevertheless, it used to be self-regulating. But a series of

financial scandals involving once prominent companies such as Enron, WorldCom and

Parmalat lead the authorities to consider whether the accounting profession′s self-regulatory

oversight system was appropriate to meet the necessary objectives. These corporate failures

had shown that the self-regulatory system did not produce credible results and "had the

potential to undermine investor confidence in the integrity of the securities markets" (The

Treasury, 2006)

.

As a consequence a number of countries have reviewed their arrangements

for independent oversight of the auditing profession. The United States, for example, has

introduced tough external audit regulation under the Sarbanes-Oxley Act of 2002. Canada has

also introduced a regulator with extensive powers, including a national inspections unit as

independent monitor of major audits, while the British and Australian solutions are based

mainly on oversight rather than on full regulatory control (Malthus and Scoble, 2005).

However all these oversight bodies are needed to protect the public and the credibility of

financial information.

The aim of this paper is to describe and analyse the developed oversight system of external

auditors in countries such as the UK and Germany and compare it with the standards in the

USA. It also considers the extent to which auditors are supervised in each of the mentioned

countries.

First it is important to clarify why an oversight is necessary, thus the essay commences with a

short introduction of recent events that finally led to a review of the oversight system.

Following, the particular bodies in the countries stated above are mentioned, including the

accordant regulatory systems and bodies. This part responds especially to the functions of the

bodies, their responsibilities and the changes that were undergone since the establishment of

the system. The fourth chapter reviews the system and deals with reflections and criticism

from the public side. In the fifth and last chapter a short summary of the previous chapters is

given.

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