A commentator on this blog made the following excellent point:
In a functioning market, if the auditors are seen as less than competent, there should be a cost to this e.g. a company goes to the bank and asks for a loan. Bank asks to see audited accounts. Then says, these were audited by (to pluck an example out of the air) PWC. We don't have confidence in their audit procedures so we'll either refuse to give you the loan or charge a premium rate.
The shareholders then say "why are we paying these cowboys?"This doesn't seem to happen. I can suggest partly why:
1) Virtual monopoly of audit services by 4 suppliers
2) The banks don't criticise the big 4
3) Lack of transparency in the process above. Even if the banks do charge higher because of the auditor, the shareholders won't get to hear of it, at least not through official channels.How can all this be changed?
I have three suggestions:
- Let’s stop assuming only the Big 4 can audit. The evidence is they can’t.
- Let’s stop assuming only the private sector can audit: the evidence is there is market failure requiring intervention;
- Let’s create a state run audit function and let’s give it the power to advise HMRC and other regulatory authorities of its findings when tax abuse and other regulatory offence is identified.
Discuss.
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All public companies (of a certain size) to be audited by the state audit function with the private sector (beyond big 4) left to do the rest. Sounds like the plan the FRC are looking for when one of the big 4 passes away. Half the partners of the remaining big 4 would then be happy get rid of their litigation rich audit colleagues.
Hooray. Couldn’t agree more. Obvious example but would a public sector audit body, who didn’t rely on the businesses they are auditing paying them, have ignored the substance over form issue regarding the banks liabilities. Banks company accounts should have been qualified years ago. Instead, Enron style, the substance of transactions were ignored. This is inherent corruption and all audit firms who allowed banks company accounts to go unqualified should be disbanded, as happened to Andersons and replaced by a state funded audit institution. Never let the Corruption Crunch, sorry Credit Crunch, happen again.
The trouble is the people who would be in this state auditing body. Most likely, they would end up being the same people who were in the Big $. Would they be independent? We would need to watch the revolving door between industry/banks and the auditing body. What use would an “auditor” be who was expecting to pick up some nice directorships after a few years in the “audit” department?