Yesterday was not a good day for the accountancy profession. The latest joint hearing into Carillion by the Work and Pensions and the Business Select Committees produced some damning verdicts on the limitations of audit and the role it plays in corporate governance. Frank Field MP called the auditors ‘mere spectators’ to the company’s collapse: if anything, Rachel Reeves MP was even more scathing, commenting that ‘audits appear to be a colossal waste of time and money, fit only to provide false assurance’.
How should we reflect on and then respond to this? We have to start by acknowledging the needs of wider society and particularly, those with a stake in a business – investors, of course, but also employees, pensioners, suppliers and customers. If our profession is falling short of their expectations in some way, then that is our problem, not theirs. We need to show that we understand that, and then demonstrate the steps we are taking to address their concerns. In the case of audit, we do need to ask the question: ‘Is the service we provide today what is wanted, or does it need to change in some way?’ We may not like the answer we get. Of course, the issue is unlikely to be just audit: the governance, the systems and structures within which audit operates may need serious reform – but we must be prepared to play our part in achieving a better outcome all round. The alternative to evolution is extinction.
That is why I believe that what Michelle Hinchliffe, KPMG’s Head of Audit, said at yesterday’s Select Committee session was both correct and timely: ‘Perhaps an audit needs to do more. Perhaps auditors need to provide more ongoing assessments of the risks to businesses and not just a 12-month snapshot’. I would be surprised if the Select Committees did not build on that suggestion in their recommendations at the end of this inquiry. That would throw down the gauntlet to our profession - and I think, rightly.
With the Government and the FRC, ICAEW is ready to help accountancy rise to that challenge.
Companies will continue to fail and for diverse reasons – no matter how much the audit scope is enhanced. To attribute company failure to auditors' lapse is neither fair nor will it serve any purpose.
Indeed, instead of agreeing to “do more” and then inevitably failing to satisfy users’ ever increasing expectations, the auditors should scale back the scope of audits (and fees) and educate the users of what a typical statutory audit can do and what it cannot do. It should be clarified that audits are a review of historical financial statements to identify misstatements and cannot and should not be expected as a substitute for robust owner and management controls.
The problem here doesn't lie entirely with the auditor. An audit can only do so much, the governance on directors and the wider management is where the focus should be directed. The trouble is auditors become the first strand of blame in what is actually a much bigger picture.
It would be a good start if auditors were equally focused on their output meeting the satisfaction of the governors and interested parties outside of the organisation as they were on recovery rates and fees.
It's a cultural shift that's needed to address the underlying problem. Professional services firms are built on the basis of maximising return to shareholders, not providing the highest quality work to their clients.
What does anyone expect to happen in that model?
Perhaps we should be focusing more on predictive Audit work rather than largely looking backwards.
More power to your elbow on this, Michael.But let's please include all our members in this challenge, starting with those hard working Members in Business and the Smaller Regional Firms who support the SME Sector. Confident Chartered Accountants with the necessary Business Development Skills can encourage Responsible Risk-taking; and in doing so can lead the charge to Sustainable Growth.To achieve the real culture change you seek we need to start at the bottom and work upwards. The vast majority of businesses in the UK are SMEs and an increasing number of them are not engaging early enough with Chartered Accountants. I see this every day in my work with Novice Exporters for the Department of International Trade. The increases in the Audit Threshold in recent have made the problem a whole lot worse: and it is a real worry.