The report was highly critical of the 'big four' accountancy companies
The job of an auditor is be the shareholders’ watchdog and check that companies’ accounts are “true and fair”.
However, as shown by the Carrilion, BHS, Patisserie Valerie and many other scandals – auditors often fail in this duty. This can lead to major problems for shareholders, employees and society at large.
Reacting to these scandals, Parliament’s Business, Energy and Industrial Strategy committee held an inquiry into auditing.
Here’s six ways in which auditing they found that auditing is not working.
1.Auditors are not looking for fraud.
Patisserie Valerie’s former finance director was arrested on suspicion of fraud after a £40m black hole in the company’s accounts was detected.
How did the auditor, a company called Grant Thornton, not spot the black hole?
According to the company’s chief executive David Dunckley, they weren’t looking for it. “We’re not looking for fraud,” he said.
The report says that this attitude is shared by the big four accountancy firms – KPMG, PWC, EY and Deloitte. They don’t regard looking for fraud as their job, saying it’s too hard to find, the report said.
However, the report’s authors think it is their job. They said: “The detection of material fraud is, and must continue to be, a priority within an audit. Audits must state how they have investigated potential fraud, including by directors.”
The Financial Reporting Council regulator also said finding fraud was an auditor’s job.
Their CEO Stephen Haddril said: “The auditor is clearly responsible for detecting fraud in the company, but there is this mythology that has grown up of “we’re not going to find it”.”
2. Auditors do not look to the future
Similar to above, the audit firms argued that looking to a company’s future was not their job – and complained that the public thought it was.
” The public is right,” said the report. “Audits are and should be forward looking, under the “going concern” assumption.”
Auditors have to judge whether a company is a ‘going concern’ – which means whether it is likely to stay in business for another year.
Despite this, there have been many companies which have collapsed recently after an auditor declared them a ‘going concern’.
3. Auditors have conflicts of interest
Auditors almost always work for the ‘big four’. These companies make most of their money from providing advice to other companies – often the same ones they are auditing.
Is a Big Four auditor going to ask those difficult questions of a company, if that same company is giving his firm millions of pounds in consultancy fees?
“The culture of advisory service does not sit easily with the culture of challenge required by audit,” the report said.
The report recommended the auditing divisions of these firms be seperated from the consultancy divisons in order to end this conflict of interest.
4. Auditors are not stopping excessive dividends
Another job auditors have been failing at is determining a company’s profits and working out how much can be given to shareholders as dividends.
For example, Carillion paid out a £54m dividend just before it announced a £875m hit to profits.
This duty is called the ‘capital maintenance regime’ and the report said: “Compliance with the capital maintenance regime is patchy at best and it is not adequately audited.”
5. Auditors do not feel accountable to shareholders
Auditors are supposed to work on shareholders behalfs but the two groups rarely meet each other.
The report recommended that auditors should do a presentation at company’s annual general meeting – so that shareholders can hear what they’ve done.
6. Boards are appointing auditors for “cultural fit” not professional scepticism
An audit committee is a group of people on a company’s board of directors who, among other things, appoint auditors.
The report found: “Many audit committees are placing an auditors’ “cultural fit” and “chemistry” above their professional scepticism.”
The report echoed the Competition and Market Authority’s proposal to increase regulatory oversight of audit committees.
If this proposal does not work, the report said, the regulator should possibly be tasked with appointing independent auditors itself.
Joe Lo is a freelance journalist and a reporter for Left Foot Forward
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