The institute has welcomed the realistic approach the paper takes to Enron-related issues and is satisfied that the paper covers most of the significant issues facing the profession.

While broadly welcoming the paper, the institute does note that the current emphasis is not on small businesses and the small practitioners that service them. The institute's response comments that while the underlying ethical principles are the same, the circumstances are often so different that overly detailed requirements aimed at one size of business/practice will have a disproportionate effect elsewhere.

The response also notes that the ESB paper gives the impression that current issues in financial reporting are the sole responsibility of practising accountants, whereas much more needs to made of the issues relating to the pressures on accountants in industry and commerce, which have an immediate and direct effect on the quality of financial reporting. The institute notes that the Sarbanes-Oxley Act proposes disclosure of whether businesses have a code of ethics for senior financial officers, including the 'principal accounting officer'. In order for confidence to be restored in the structural integrity of the overall governance arrangements for companies, it is essential that those with both executive and non-executive responsibility for the financial reporting and auditing process be of the right calibre, and operate within an effective regulatory framework. Such a framework for accountants in business includes an ethical framework and a means of reporting and acting upon adverse pressures.

The institute believes it to be vital that changes implemented to raise public confidence in the regulation of auditors in the UK and Ireland do not result in a reduction of audit quality. It is agreed that appropriate safeguards should be implemented, and to that end the institute's council has already agreed that the provisions of the EC Recommendation on statutory auditors' independence should be adopted. Guidance on auditor independence has been prepared and will be considered by the institute's council on 2 October. It is now envisaged that this guidance will become effective, subject to transitional arrangements, from 1 November.

The response states that a strong, independent and knowledgeable audit committee is an important element in achieving auditor independence in relation to public interest entities, and that broadly drawn general guidance might be appropriate.

The institute recommends in its response that independence requirements for different types and sizes of entity need to be differentiated in terms of detailed application of the underlying principles. This concept is supported by the European Commission and International Federation of Accountants (IFAC) in their latest independence guidelines.

The ESB consultation paper also asked if there should be a restriction on the provision of nonaudit services to audit clients. The institute believes that the principles-based approach, reinforced by the additional international guidance covers this area already. The institute's ethical code does not allow audit firms to provide non-audit services to their clients where this would compromise their independence. It is suggested that rather than imposing a blanket restriction on the provision of all non-audit services, a better safeguard on independence is to ensure that the auditor's overall income from the client is not unduly high and that an oversight partner be required where the income of an individual partner or office within the firm is heavily dependent on a single client.

In terms of rotation of the auditing firm, the institute would be unable to endorse measures intended to improve perceived independence which would have the unintended consequence of a reduction in the quality of audit work.

It is recommended that, rather than compulsory rotation of the audit firm, a better safeguard would be to rotate the audit partner, with further safeguards where an individual or an office within the firm is too dependent on one client as referred to above. The institute already has this requirement in place for listed company audit clients.

The full response is on the institute's website at www.icaew.co.uk/publicassets

The Ethics Standards Board issued Setting the Agenda for Ethics in May to promote thought and debate across the entire spectrum of ethical issues faced by accountants working in industry, commerce, the public sector and public practice. The text can be downloaded at:

www.accountancyfoundation.com/ethicsstandardsboard