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.
Carillion was financially unsustainable.
ICAEW appears to place more emphasis on environmental and diversity sustainability than financial sustainability. That is a pity, as we are a financial profession, not social workers to the world as our executive appears to believe.
We can avoid another Carillion by requiring auditors to certify that a business is financially sustainable in its present state or better for [three] years from the date of audit sign-off. If this cannot be done, auditors should be required to state in detailed terms what they consider to be the barriers to such sustainability. Had Carillion's auditors done this, they would soon have noticed what the problems were.
But like Mr Poole, I severely doubt whether the Big 4 will allow ICAEW to break up their tidy oligopoly. ICAEW executive recognises the expectation gap but consider it misconceived. That is not the correct response. If we are to protect the reputation of our profession we must fill the gap. As we found in tax, however misconceived the expectations, whether we like it or not they must be addressed.
I agree with Mr Quinlan about the expectation gap. Everyone agrees that there is one, and it is vitally important, not just for the future of the profession, but for the future of business investment that we need to address that gap. And that doesn't mean trying to tell investors that it is not the auditors role to predict corporate failure.
I agree with Mr Quinlan that we need to address the expectation gap, and that doesn't mean changing expectations, it means changing what auditors deliver. Investors expect auditors to provide assurance of the company's stability and business model and that is what the profession must provide.