A Watershed Moment

As I said on the Today programme last Wednesday, I believe the report on Carillion published last week by the Work and Pensions and the Business, Energy and Industrial Strategy Select Committees, represents a watershed moment for our profession.

The report rightly and squarely places responsibility for the collapse of Carillion, on the board and senior leadership of the company, describing its business model as “an unsustainable dash for cash”. There are robust recommendations relating to corporate governance and culture, government procurement, pensions regulation, investors’ rights – and audit.

It is too easy to see the MPs’ conclusions on audit and auditors as simply describing well-established issues which have long resisted everyone’s best efforts to resolve. Yet, reflecting on the conversations I’ve had with members, firms, journalists and politicians over the last few weeks, I have a real fear that we won’t have an audit profession worthy of the name in twenty years’ time if we don’t act decisively to sort these problems out now.

We need to think long and hard about how we can close the expectation gap that has developed. Yes, we need to do more to demonstrate the value of audit, but we also have to evolve it to better address the needs of wider society - investors, employees, pensioners, suppliers and customers. Technology can help us do that, so we should be exploring that too. I believe that audit is fundamental to a well-functioning economy. Every day, thousands of audits do exactly what they are supposed to do – contributing to an environment which encourages investment and business growth. But if trust in the profession is eroded, then even the contribution which those many good audits make to maintaining confidence in business, will be undermined.

We need to look at the structure of the Public Interest Entity (PIE) audit market and remove the barriers to firms who are put off entering or indeed staying in this market because of the risks. I blogged on this subject in March and I think there is a real opportunity now to advance some of these ideas. I strongly believe that helping additional competitors break into the market is a much more constructive way forward than breaking up the Big Four, or creating audit-only firms.

And finally, we also need to play our part in the review by Sir John Kingman, of the Financial Reporting Council. We want to ensure the oversight regulator of our profession is able to focus on clearly-defined areas of responsibility, with the powers it needs to hold boards of directors and the profession to account for their actions, whilst not straying into areas where it is not needed or where its competence could be limited.

The worst possible outcome from the select committees’ report on Carillion would be a return to business as normal – which would last only until the next corporate collapse. We need to ask uncomfortable questions of ourselves and not shy away from answers we don’t like. But most importantly, we need to make sure that public confidence in audit is safeguarded.

Anonymous
  • What is not a sensible way forward is the suggestion of “audit only firms” . What auditors need to do is expand their role into more forward looking audits and follow Lord Charmans Report and report on the viability Statement. 

  • GThis is only the latest in a series of scandals.

  • Incidentally, and not directly on the point, it has been widely reported that other Big 4 firms than KPMG and some magic circle lawyers were paid very substantial fees after the point when it must have been clear Carillion was bust to the tune of £10bn odd.  On the face of it, this appears to constitute fraudulent preference.  The Official Receiver is liquidating the group as presumably as all the Big 4 were conflicted out.  It would add insult to injury if the OR does not investigate very carefully the timing and circumstances of the payments that were made.  The world and particularly Carillion's other unsecured creditors need to know there was no dirty work at the crossroads.

  • apart from the pressure felt by auditors as a result of the collapse of saveral big named companies in recent years through poor accounting practices there is a wider concern for those investing in such companies because no obviously new thinking comes out of the profession and the ICAEW investigations(only after months and years) seem to whitewash those involved in what appear to be unsatisfactory audits.