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.
Creating a more competitive audit market is very easy. ICAEW simply needs to include in its regs that no firm that employs any of its members as partners (or equivalent) may act as auditor to more than 15 FTSE 100 members, and 40 FTSE 250 members. Right there you create the need for 7 audit firms, and give them the incentive to invest and compete. Of course you’d never do this because, despite your faux concern about all this, you’re a big fanboy of the current state of affairs. The Big 4 keep ICAEW in the manner to which it has become accustomed, and you have neither the desire nor incentive to change anything. Hopefully the government will now do what you are unwilling to do.
Very good idea from Mr Poole. However the whole problem has arisen because audit firms have lost sight of first principles. The Big 4 spend millions of dollars each year in order to research and develop algorithms which will indicate whether or not the audited company is a going concern. In fact, all they needed to do was get a copy of Accountants Digest No. 138 of Summer 1983 entitled Predicting Corporate Failure.