Audit firms should appoint an independent oversight board to gain the confidence of market regulators and clients, and comply with corporate governance issues that have arisen since the spectacular collapses of Arthur Andersen and Enron, a top auditing expert says. Keith Houghton, a fellow of CPA Australia and incoming chairman of the Australian National Centre for Audit and Assurance, said market regulators in developed markets such as the United States, Canada and Australia were contemplating having a regulatory oversight board to keep tabs on the process of auditing. Following well-publicised failures of large listed companies in these markets, aspects of audit independence have received wide coverage from the media, fuelling perceptions that the spate of corporate collapses resulted from deficiencies in the audit process. The profession and regulatory bodies, academic institutions and stock exchanges have also turned their attention to this issue. In Hong Kong, there have been calls for the appointment of regulators that can act as watchdogs over auditors. But such a move has been opposed by the Hong Kong Society of Accountants. 'Having a regulatory oversight board is the way Canada has gone and the US is already assessing it. In my view there are two ways in which a regulatory oversight process could be put into place. One is to formally set up an oversight board and another is to set up some sort of process of structure where auditors could be accredited for the quality of their approach and independence,' Mr Houghton said last week on a visit to Hong Kong, where he gave a presentation to the members of CPA Australia. Outlining the distinctions between the two processes, Mr Houghton said the first approach was essentially putting in place a policeman to oversee auditors, particularly their independence, while the other was to set up a market structure. 'Auditing is only of value to a capital market if it is both competently executed and independent of management because the financial report card [of a company] is a representation of the management and there is no point of an audit to simply comply with the view of the management. So an audit has to be competent and independent and it needs to be seen so, for even if it is competent and independent if the market doesn't believe so [it is of no consequence],' Mr Houghton said. Last year, the Australian government commissioned an inquiry into audit independence that resulted in the publishing of the Ramsey Report in October. 'Australia had already started considering issues of audit quality and audit independence before Enron, after we had our own spectacular collapse in the form of HIH Insurance and one.tel. HIH triggered a public outcry and that started the ball rolling,' Mr Houghton said. He also said companies in Southeast Asia, including those in Hong Kong, were slowly warming to corporate governance issues, especially those of appointing quality auditors, because they realised good quality governance led to more efficient capital markets. 'Recently we have seen improving [corporate] governance in that the appointment of auditors is moving from the management to the boardroom. So the board decides the criteria for appointment of the auditor, the board does the selecting process, [so] the board makes the decision, not management anymore. 'The board sees auditing as part of the corporate governance package, the auditor is not the adversary anymore . . . So auditing is now part of the corporate governance process rather than just a compliance one,' Mr Houghton said. He also said the process of appointing independent directors on a company's board was gaining momentum in the region, as companies realised the correlation of the management to that of the company's stock price. 'We have seen that the appointment of independent directors have been rewarded by higher share prices,' the audit expert said.