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.
I've always thought that for an audit to be independent it needs to be paid for from a "pot" rather than the company being audited - the pot to be filled by those needing to be audited. The audit might then be less of a box ticking exercise and more open to scrutiny. Audit might well need to move forward but it sounds as though KPMG did not do the job properly - perhaps they are now just too big.
With respect to Malcolm, his remarks appear to reflect the official stance, and he seems to be an outlier in these responses. As someone who has been preaching a holistic approach to corporate governance for twenty years, I see chickens flocking home to roost in their thousands. The “reliance on compliance” as I call it, is a mutual understanding between big business and the Big Four accountants particularly, with the Institute falling meekly in line. The accountancy profession has defined good governance in financial terms, very tightly, such that softer issues such as an unethical culture and anti-social or environmentally damaging behaviour are outside the remit of the audit. However, these are the very issues which invariably lead to corporate scandals and the public and politicians can’t understand why common sense can’t be applied to the audit process, especially when there is widespread scepticism in the wider world about these companies. Then there is the long-standing conflict of interest resulting from firms using low margin mandatory audits to generate higher margin consultancy which has been obvious for so long. The reputational loss which the giant firms are creating drags down the whole profession and can only be tackled by a dramatic new initiative from the professional body controlling standards. And that isn’t by levying bigger fines, but by reconsidering what an audit is supposed to be for. In other words, tackling the “expectation gap”. My answer is to integrate holistic corporate governance with the current audit. But that will take much longer to explain and I’ll be posting details on my own blog shortly.