ACCOUNTANCY ONLINE – AUGUST 2019

Missing the real point has become an art form

EMILE WOOLF

The saga of the audit giants rumbles on without any discernible sign of resolution. Even member firms within this group do not speak with one voice on proposals for reform, and recommendations from regulators have so far come up with few viable options. For example, compelling Big-4 firms to engage a smaller (but still pretty huge) firm as joint auditor of listed companies is just one typically impracticable notion that has been put forward.

Compelling giant firms to impose a “strategic and operational” split between their audit and non-audit services is also pie-in-the-sky if the two sides of the business remain commercially intertwined. Take those words “strategic” and “operational” and ask yourself what they actually mean, in context. The first suggests that each branch of the (same!) business would promote, even re-brand, its services independently, perhaps engaging different consultants in the process.

 

An “operational split”

 

More relevant is “operational” since it implies that each side of the firm would engage its own professional personnel, would presumably be located and governed separately, would be subject to its own financial controls, budgeting, pricing policies, ethical rules, criteria for advancement and profit-sharing – and that there would be no crossover of work.

But ask yourself what would happen if the law permitted the firm to offer its shares to the public. Would listing criteria be satisfied if only one part of its revenue is disclosed? Strategic and operational are all very well – but the missing word is “ownership”.

Independence will remain a fanciful pretence for as long as there is any taint of a financial interdependence between audit and non-audit. This strikes me as blindingly obvious – yet, amazingly, neither last year’s Kingman report nor the Competition and Markets Authority’s findings identified it as an answer to the maiden’s prayer for proper audits!

 

FRC: no ban on consulting for auditors

 

Enforcing it in its purest form would require that the work of auditors of listed companies is restricted to, well, auditing! Yet, the Financial Reporting Council’s recently proposed ethical rules on auditor independence include no fewer than 27 pages on the challenges to independence that arise when auditors undertake any of the various non-audit services encountered in practice, but there is not a word suggesting an outright ban as worthy of consideration.

We all know what the real problem is: the range of non-audit services, that now might even include running a law firm, is so extensive that it is commercially unthinkable for a Big-4 firm to agree to give it up. Liquidators, receivers and administrators, for example, are wonderfully placed to charge fees without reference to hours spent – a virtual licence to print money.

Though an audit fee might run to over a million pounds, auditing is now the poor relation in this divided hegemony. Moreover, these firms have powerful allies at senior levels in the Treasury and with government regulators, and it is no surprise that such a commercially sensitive nettle has not been grasped.

 

Patisserie Valerie – a case in point

 

Seeing it in action always sheds some clarity. We have all heard about the Patisserie Valerie debacle. The company went bust following the discovery of a £40m accounting fraud involving fake invoices, after which KPMG were appointed joint administrators and the company’s auditors, Grant Thornton, were sacked.

Since it was obvious from the outset that Grant Thornton might, at very least, face questions about its audit, what would you say if it turns out that Grant Thornton just happens to be KPMG’s own auditor? That unfortunate coincidence doesn’t seem to have deterred KPMG when they were confronted by a lucrative appointment as an administrator of Patisserie Valerie. The mindset is endemic.

Under the status quo, resources follow the money – which means that the quality of auditing will continue to languish behind investor expectations, and scandalous failures will continue to shock.

 

What businesses and investors think of audits

 

Speaking of which, a recent survey has shown that fewer than half investors consider that audit currently meets their needs, while a majority of investors and businesses believe that the scope of statutory audits should extend to quality of internal controls, identification of possible fraud, future prospects and risks. (I somehow imagined that such basic considerations already featured implicitly in any audit worthy of the name.)

The veneer of regulatory bustle, and worthless big-firm assurances about reforming their work, has overlaid the key independence issue, and there will be no substantive change.

Useful interim measures would, however, remove the LLP fudge that bestows legal protection on individuals involved in grossly negligent work; and, secondly, re-channel the multi-million fines levied on firms into compensating their victims – rather than their trade bodies that masquerade as upholders of standards and dispensers of justice.

But don’t, just yet, anticipate a revival of accountability.

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