The FT has reported this morning that:
The Labour party has called out the accounting profession, pledging to eradicate poor practices following high-profile corporate collapses.
It added:
Mr McDonnell said Labour had commissioned an independent review of how Britain's audit market operates, including how it is policed by regulators.
The review will be led by Prem Sikka, a professor of accounting at the University of Sheffield and an outspoken critic of the Big Four audit firms: PwC, Deloitte, KPMG and EY. The review will examine whether existing regulatory bodies should be merged, abolished or restructured, and will consider the appropriate level of fines for accounting firms when misconduct is exposed.
Three thoughts. First, I welcome this. Prem and I are both participants in a small and informal group discussing such issues, and have been for a long time.
Second, the move is necessary: the government appointed investigation looks like a whitewash from the outset, as I have already suggested.
Third, the suggested remit is fine, but at the end of the day a review needs to go much further. I am speaking at the audit and assurance conference of the British Accounting & Finance Association (the body that most UK accounting academics belong to) in Dublin this week. I will, of course, discuss regulation. But I will go much further. If the data that is audited is itself meaningless, even to the directors asked to sign it, what I will suggest is that an audit, however good the quality and however well regulated it might be, cannot make good the deficiency. And the trouble is that we now have accounts that do not make sense to most users; that are not designed to meet their needs and that are, far too often, not available to the stakeholders who need them and who are, in any case, denied the chance of an audit.
Reform is needed, and it needs to go much further than some moves on regulation. Audit has to be of relevant data. Nothing less than an accounting revolution is required.
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It’s a good start and as you’ve said in other posts this is gaining momentum. Nice.
“Audit has to be of relevant data”. The problem is, relevant to whom? Relevant for what purpose? The data currently produced is presumably satisfactory (sufficiently relevant) from the perspective of those who produce it (those who pay for it, or decide for those who pay for it).
It is quite striking to me, the general apparent apathy, lethary and inertia of “shareholders” (as an interest group) towards reform of data presentation, given the disasters surrounding, and following the Crash. At the same time I have never thought the “Markets” are greatly interested in exercising control qua “shareholders” in a company that needs reform.
In the modern world shareholders do not “vote” when they make the big decisions to invest or disinvest; or rather, they vote only with their feet, or money: they buy or sell the shares, but rarely vote (other than in support of managment, which means when they are content – big shareholders prefer passivity). I do not claim this is supported by research; it is my intuition, and my persective of experience. Meanwhile, the data may be insufficiently relevant to anyone else, or even usable for any practical purpose. And there is the problem.
These are issues I will be addressing….
You’ve suggested one review will be predictably benign.
Won’t Prem’s review be just as predictable but in the other direction (ie scathing)? Why should we expect anything otherwise? What will be the purpose but to please those who already agree with him?
How about the aim might be to inform real change for4 the sake of those who need it?
Is it a review or a campaign manifesto? I don’t have a problem either way (free country and all), but clear labelling of the purpose of the exercise helps avoid confusion.
If it is a review, one would expect identification of at least some positives with the status quo worthy of praise.
Insofar as you know Prem’s views, what positives would you expect him to identify? What positives would you identify if you were conducting a review? Hard to believe there aren’t any.
We have company law
We have some accounting understanding
We hve people who could be trained to make a new system work
We have people willing to say we want a new system
There is a body of literature we can draw on which makes clear what the needs are
Is that a good start?
Richard
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