When WILL auditors shape up?
This could be the week that finally shakes the complacency out of the Big Four audit firms, and their toothless watchdog, the Financial Reporting Council.
it’s about time. inept auditors have rubber-stamped the accounts in a series of scandalous business failures, to the point where many wonder what is the point of having an audit at all.
As for the FRC, it has been slow, timid and too close to the firms it is meant to be regulating.
sir John Kingman, a former mandarin who chairs Legal & General, has led the investigation into the FRC, and the profession is also braced for a separate probe conducted by the Competition and Markets Authority into the dominance of the top quartet: KPMG, EY, PwC and Deloitte.
Radical reform is overdue. since the financial crisis, the audit profession has shown itself incapable of drawing attention to serious weaknesses in company finances. Audits are meant to provide assurance for shareholders, including City firms like L&G which look after our pensions.
instead of being a bulwark of public trust, the big audit firms have undermined it by their repeated failures.
Take the case of the collapsed mortgage bank hBOs. in February 2008, KPMG gave a clean audit report to hBOs on its 2007 accounts, which, incredibly with hindsight, reported a profit of more than £5bn. Just a few months later, on October 1, 2008, hBOs had to be rescued by Lloyds and bailed out at huge expense to the British taxpayer. its 2008 accounts showed an £11bn loss.
Clearly, KPMG owed an explanation about how on earth it did not spot any problems in the accounts of a lender on the brink of self-destruction. it was the job of the FRC to make sure the firm did just that.
The foot-dragging watchdog was so absurdly ineffectual it would suffer by comparison with inspector Clouseau. First, it nonsensically claimed it couldn’t start a probe until the City regulator, the Financial Conduct Authority, had finished its inquiries. Then, when finally forced to bestir itself several years later by MPs on the Treasury select Committee, it concluded KPMG had done nothing wrong.
it was not until nine years after the downfall of hBOs, in the autumn of 2017, that the FRC finally published a report on its investigation of the auditing of the doomed bank.
The financial crisis was a decade ago but the audit scandals have continued. KPMG has graduated from hBOs to Carillion, where it was auditor for 19 years, pocketing £29m in fees.
What should happen now? The Big Four should be made to separate their audit arms from their consultancy and tax advice businesses and should be forced to stop advising firms on boardroom pay, to lessen potential conflicts of interest.
A drive for simplification and transparency is needed. The whole point of accounts – which is that they should enable investors to see what is going on – has been lost. Accounting standards have become too complicated, open to abuse and in some cases produce perverse effects.
Anyone would think the financial statements are designed to baffle, not to inform.
The FRC’s responsibilities, which include corporate governance and accounting standards as well as overseeing auditors, are too broad. it is beyond reform so should be disbanded and have its work divided up. We urgently need a new audit regulator who is prepared to get tough.