My friend and colleague Prof Prem Sikka has argued since time immemorial (or so it seems) that auditing is a corrupt profession. He is, of course, right. His extensive CV provides the links to all the evidence you need - or just read this, one of his many accounts of this.
I think PWC's failure to highlight the LIBOR risk at Barclays is just another example of this failing.
We now know banks have to be split to reform them: until that happens the cancer of investment banking will infect the rest of our economy uncurtailed.
But we also need to split up the auditors. For decades the Big 4 firms have resisted this split and have supplied a wide variety of services as well as audit in a noce cosy arrangement that keeps out all others.
That's no longer good enough. It's either time to split off their audit functions for good -= or to shift the audit function away from them altogether. Since they'll resist I think the latter has to be explored, thoroughly.
There is an obvious way to do this. Audit could be funded quite easily. A fee should be set for each company based on the size of its turnover (risk is usually related to turnover), status (plc or not) and capital. That fee would be paid as the annual return fee for having the company regulated - to a reformed Companies House. And they would then audit the company. But the payment would be unrelated to the audit and the fee would not therefore be an issue that cloud judgement on the opinion, and nor would the issue of re-election do so.
Of course: the state would also then asume responsibility for risk. But do you know what? Qualified audit reports of the sort we're familiar with in the public sector - where standards of audit are much tougher - would then become normal - as should be the case. And let's also be honest - in many cases the state carries the risk anyway.
It's not just banking that needs radical reform. Auditing does too.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Rather than everyone doing their own thing – perhaps the best thing would be to put everyone’s efforts behind the Barnier proposals at the EU level – e.g. see here http://www.vrl-financial-news.com/accounting/intl-accounting-bulletin/issues/iab-2011/iab-500/what%E2%80%99s-inside-barnier%E2%80%99s-propos.aspx
Good to see someone else who left school with only CSEs (as I did) has done well for himself, Richard (though I doubt I’ll ever make professor), and that he got his degree from my employer of the last decade or so.
By the way, Seamus Milne’s piece in today’s Guardian is well worth a read when (if) you get time: http://www.guardian.co.uk/commentisfree/2012/jul/03/private-banks-failed-barclays-scandal
Prems’ first degree was his last degree
Agree re Seamus Milne’s article
‘Prems’ first degree was his last degree’
Yes, I noticed that. Very unusual to get your PhD first, but looking at his publications list not surprising 🙂
Just into two ?
How about complete closure and multiple prosecutions ?
The Many Ways Banks Commit Criminal Fraud:
http://www.zerohedge.com/contributed/2012-07-03/many-ways-banks-commit-criminal-fraud
Very brave statement to say that auditing of companies accounts should be nationalised, not that I disagree – but it does go against the grain. As with many of the other proposals on this blog this would probably provide a more even playing field for all companies. As we continually see however, a level playing field is not what big corporates desire. They prefer the status quo that offers them a monopoly and all the benefits that they accrue as a result – if capitalism really promoted free markets we wouldn’t need a competition commision.
It’s not just banking and auditing that need effective inter-governmental intervention; if sustainability is to be more than a catchphrase we need a truly courageous state. But who will deliver this?