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.

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  • There is a wider problem in business culture of not being able to accept blunt truth. If auditors were to consider stating, as Mr Quinlan suggests, barriers to economic sustainability there would be such enormous resistance from senior management, and such an enormous fuss from investors, that the report would be thoroughly neutered before publication.
    The ICAEW should be campaigning for people on all sides to accept that there can be differences of opinion and of interpretation, and that these are beneficial. If everyone is saying the same thing that's a sure sign that something is being concealed, as we learn from popular crime stories.
    Accountants can learn from scientific research in this regard. Scientists who are experts on a subject can disagree, but the wider community accepts and expects such disagreements. Where there is no disagreement there is no need for scientists, and the same applies to accountants.
    It's very easy to judge the quality of someone's work by whether you agree with them, but also wrong. A culture in which audit quality and therefore further business is not linked to agreement with senior management is essential, whether achieved through soft means or rules and regulations.

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