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.
I think the obsession with splitting up the Big 4 is focussing on the wrong problem. From what I have seen of firms outside the big 4, they are not necessarily any better. The rewards of being a partner in large firm do seem disproportionate to the skills, expertise and risk however.
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.
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.
The remuneration and appointment of auditors needs to be fixed by all the stakeholders, excluding executive directors of public companies. Until this happens the Robert Maxwells, and Phillip Greens of this world, who 'talk' better than they 'walk', will return to haunt and impoverish us.
I lost my (small) investment in Coloroll = Mr Green. I did not invest in Carillion and Mr Green. My experience across several industries partly thanks to several years with....KPMG, led me to beware of larger than life characters who 'talk the talk' but don't always manage to 'walk the walk'. Valuing intelligently, large unfinished construction contracts is difficult but as with complex financial instruments, not impossible. It generally requires research, patience, attention to detail....and a reserved view of what managent tells you. Hoodwinking junior audit staff is, unfortunately, generally not difficult. Partners that are too close to management (who agree the fees) may not provide the needed checks and analyses.