Horwath Clark Whitehill has been rapped by the accountancy watchdog for having performance appraisal criteria that appears to reward partners for cross-selling non-audit services to audit clients, contrary to ethical standards. 'In our view this is inappropriate and needs to be changed,' the Financial Reporting Council's Audit Inspection Unit said in its 2009 report. This is the first year that a public report on HCW has been issued by the AIU and although the firm was found to generally have 'appropriate policies and procedures in place for its size and the nature of its client base in the relevant areas which are subject to our review', it has been pulled up on certain areas including appraisal, partner rotation and audit training. The AIU said the firm has not produced guidance on what constitutes audit quality objectives. 'The review found specific quality objectives were not always clearly identifiable, with seven of the 10 staff appraisals selected for review not explicitly considering audit quality in assessing performance and in setting objectives'. The firm was also pulled up for having no 'explicit link' between staff appraisals and remuneration awarded. On partner rotation, the report said that HCW hadn't extended its listed company rotation requirements to non-listed public interest audit clients. For non-listed audit clients, the firm has a policy that states when an audit partner or senior staff member has been involved with an audit for more than nine years, the audit teams go to the ethics partner to justify why that partner should be allowed to stay on, but many did not state how long the partner had been involved to begin with. 'In our view, this information should have been sought by the ethics partner when determining whether to approve the extension,' the AIU said. The AIU also said that with regards to audit training, HCW had no procedures or guidance in place to ensure non-attendees participate in alternative training sessions, but this is something that the firm will be monitoring. Overall, the AIU said it was 'generally satisfied with the basis on which significant audit judgments were exercised' on the five individual audits it reviewed. But it found deficiencies in the analytical procedures used to obtain audit evidence in three of those audits including the setting of the difference between recorded amounts and expected values that was acceptable without further investigation. 'As a result, in one of these audits there was no substantive audit evidence obtained over investment income, which was a material amount in the financial statements,' it said. In its response to the report, HCW said: 'Audit quality is important to us and we take it very seriously.' 'A number of the matters identified by the AIU and included in the public report were also identified by ourselves in the course of our own quality assurance reviews. Any necessary changes to our procedures and our methodology have been either undertaken and completed, or put in hand,' it added.