Audit needs urgent reform
TWO weeks, two fines for KPMG. The latest is a £5m penalty for failures in the firm’s audit of the Co- op Bank after its disastrous takeover of Britannia building society, hard on the heels of a £6m hit last week for its audit of insurer Equity Syndicate Management, which traded as Equity Red Star.
These fines sound painful but in the context of the sums audit firms rake in from their clients, they are chicken feed.
The £5m penalty for Co-op Bank (actually £4m after a reduction for prompt settlement) is less than KPMG earned in a single year from the parent group.
In 2011, Co-op paid £5.6m in fees to the audit firm, then £7.4m the following year.
This gives a clue why, despite two hefty fines last year – £2.1m for the audit at fashion company Ted Baker and £4.5m over scandal-hit insurance operator Quindell – KPMG still managed to rake in £2.3bn of revenue. It also explains how, despite the clouds hanging over the profession, it managed to pay partners an average of just over £600,000 each last year.
The fines for poor audits barely scratch the surface and are far too small in the context of fee incomes to act as an effective deterrent. It adds insult to injury that money from fines has until recently been flowing back to the Institute of Chartered Accountants, an outfit that treads the uncomfortable line of being a both a regulator and at the same time a trade body cheerleading for the profession.
The profession is riddled with this sort of conflict of interest. There is a flow of people from the top audit firms to chairmanships and finance director jobs at FTSE 100 companies, and many regulators are former senior accountants.
Auditors do not create corporate scandals, but KPMG has an unhappy knack of being around for too many of them, including collapsed bank HBOS and Carillion, for which it is under investigation. The audit industry is facing a barrage of reviews. One led by Sir John Kingman into regulation has recommended that the current pathetic watchdog, the Financial Reporting Council (FRC), is disbanded.
This cannot happen soon enough and the FRC needs to be replaced by a regulator with real teeth.
The Competition and Markets Authority (CMA), in its probe, has recommended ring-fencing of audit from consultancy work and joint audits for FTSE 100 firms, both of which are sensible suggestions.
In yet another review, City grandee Sir Donald Brydon is looking into the effectiveness of audit, or rather the lack of it.
He needs to address a basic point, which is that audits are not fit for purpose.
If auditors are going to shrug off all responsibility for spotting potential frauds and significant mis-statements, then there is no point having them. Robust checks against black holes, collapses and scandals must be at the heart of audits, not waved aside as an ‘expectation gap’ as if it were unreasonable to expect them to spot anything at all.
Businesses are still trying to rebuild trust lost in the financial crisis and this will not happen if shareholders, taxpayers and the public cannot believe what they read in a company’s report and accounts.
We cannot afford for auditing to be an exercise in self- serving and lucrative box-ticking.
Tyrie on the warpath
WHEN Andrew Tyrie was appointed to chair the Competition and Markets Authority, there were high hopes that he would be a genuine consumer champion.
So far, he is showing every sign of surpassing expectations. As chairman of the Treasury Select Committee and the Parliamentary Commission on Banking, he was a fearsome inquisitor and galvanised the investigations into bank collapses and the reforms needed.
He brings the same energy and zeal to the CMA. His barnstorming speech yesterday set out how he wants to move it away from a focus on process and economic theory towards practical benefits for consumers.
He has some hard-hitting proposals, including the banning of directors if they are found guilty of serious breaches of consumer protection law, which should focus minds. No company now can assume a merger plan would be waved through – the routing of the Sainsbury’s plan to combine with Asda is a taste of things to come.
Tyrie has recognised that the CMA’s status as an independent competition watchdog is at risk from a Corbyn government and vulnerable to populist pressure if it is not seen to bare its teeth.
He sees that regulators must be part of the solution, not part of the problem. What a shame this seems so revolutionary.