As the FT has noted:
Britain's accounting watchdog will consider whether to ban firms from doing any consulting work for the companies they audit in an attempt to stamp out conflicts of interest in the scandal-ridden sector. The Financial Reporting Council said on Monday it would assess whether new action was needed to prevent the independence of auditors being compromised, “including whether all consulting work for bodies they audit should be banned”.
Like others who have campaigned on the issue of audit reform, I was amused by the sheer, brazen incompetence of this announcement.
Firstly, the FRC is trying to make claim for its survival by saying it will look at the issues being complained about. It is not saying it will actually do anything.
Second, the announcement made entirely misses the cause for concern. The problem is not just that Big 4 audit firms are doing consulting work for their own audit clients, although that, of course, is a matter of concern. Instead the problem is that any audit firm in this market is doing consulting work at all, which work then cuts down or even eliminates audit choice for a company seeking to change auditor to the point where conflicts of interest even prevent such change being possible. This is market failure and the dying FRC cannot spot it from a mile off.
In that case there is but one thing to do, and that is recognise that the FRC is well past its usefulness. It is time to replace it and its self-interested myopia with a new regulator, fit for purpose and structured to deliver the public interest.
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Getting rid of conflicts of interest would be good, but how can you prevent competition between pure auditors leading to a race to the bottom? Dodgy companies will always want to appoint the least observant auditor. Could there be a quality index for auditors? Each unwelcome surprise would lower the auditor’s rating? Third parties wishing to do business with a company would look at the quality of the auditor.
Did you notice I said the government should be responsible for the quality of audit?
Or was that in another piece I wrote? If so I will publish it here
Self regulation has to go
The dodgiest auditor is the one blinded by his colleagues stampeding over him to get fees out of his client.
If accounts aren’t simple enough to read by reasonably bright non-accountants I doubt they can be accounts at all. When accounts with blackholes are signed-off by auditors I cannot account for no bodies being sent to jail. We need this action removed from accountancy altogether and to bring in the Untouchables. Various regulatory bodies have failed for over half a century. More strict prohibition and jail time is needed to curb obvious dishonesty.
“Britain’s accounting watchdog will consider whether to ban firms from doing any consulting work for the companies they audit ”
FFS this shouldn’t even require thinking about. It screams corruption and crookedness to the very heavens. How can it possibly not constitute a conflict of interests ?
If the FRC has to actually ‘consider’ this it’s clearly not doing anything useful at all.
We must legally overturn the caparo judgement that said that the auditors
had no responsibility other than to the company for the audited accounts. Unlimited liability made fear of error or oversight a great incentive to check a bit more.
At the FRC I recommended that of the top four auditors any that failed the FRC investigation of its accounts being substandard of less than 95% should pay the FRC directly £2-10million as a fine to be paid to investigators employed by the FRC to probe more accounts. The bottom of the four to always pay.
The fine is self correcting and like the Security and Exchange the money goes back into enforcement.
The big four have overreached by corrupting the regulators regulation away from serving the shareholders and account users interest gradually over decades.
Having a big gathering of all workers and asking all consultants and Big four ex accountants walk out would be a team bonding and cleansing event. Was done at British Aerospace factory and workers looked in disbelief at who left!!! FRC FCA HM treasury and Chancellor Hammond should take note.
Cleaning up the wayward integrity.
As for fears of losing the indispensable persons – my reply is that the graveyard is full of indispensable men and women!!!
Please submit to the Kingman and CMA reviews…