The problems within auditing in the UK (and I strongly suspect elsewhere) were highlighted yesterday when the fifth largest U.K. firm, Grant Thornton, was fined for serious breaches of the code of ethics relating to auditing. As the BBC reported:
Accounting firm Grant Thornton has been fined £3m by a watchdog for misconduct over its audits of Vimto-maker Nichols and the University of Salford.
This related to former senior partner Eric Healey joining the two organisations' audit committees despite being employed for consultancy work.
The Financial Reporting Council (FRC) said this created "serious familiarity and self-interest threats".
A Grant Thornton spokesman said it had fallen short of expected standards.
Three of the firm's senior auditors also admitted misconduct.
The FRC fined Mr Healey £200,000 - discounted to £150,000 on settlement - and excluded him from the Institute of Chartered Accountants for five years.
The issue is incredibly important at a time when the whole future of auditing is under review because what it makes clear is that the problems within the auditing and accounting profession do not exist solely in the Big 4 firms: they extend well beyond that as well. In that case to pretend that the problem of auditing can be resolved by simply expanding the market to include the likes of Grant Thornton is just wrong. All that will happen is that the conflicts of interest and the lack of professional judgement that underpin all the issues that are arising will be spread a little wider.
There is a solution. That is to nationalise auditing. As Anthony Hilton said in the Evening Standard a week ago:
I agree with him. The time has come.
And let's be clear - there would be no problem recruiting suitable people. The NAO can do it already. So too could they if the brief was expanded.
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Once upon a time we had the Audit Commission who did quite an effective job @ local authority level. Bring them back and scrap the PSAA incorporated by the Local Government Association (LGA) in August 2014 and you’ll be half way there.
But, but, won’t somebody think of the auditors’ bank accounts and their bonus pots? The money in their accounts will be lonely.
More seriously I might suggest the SNP take note of this for iScotland. The whole point after all is to leave behind Westminster’s mistakes, not duplicate them.
If as I suspect the lobbying will prevent this the Scottish Auditor can compete for commercial work in England. Like the European state railways taking out rail franchises here.
This is a surprising report to come from the Evening Standard considering that George Osborne is editor. Perhaps he is away on holiday on the Cote d’azur living it up with the billionaires and his eye not kept on the ball!
Anthony Hilton – you are Richard Murphy operating under a false name and I claim my £5!
🙂
An audit senior manager in the big 4 earns 80k a year. Presumably this busts the public sector pay scale. How will you recruit on this basis?
How about by paying £80k
Remember, the clients will still be charged
And the profit element of £600k a partner will not be due
It’s really not hard
The public sector is quite happy to pay such salaries fore the right skills
Nationalising auditing?
Absolutely. No question given the lamentable performance of what is after all a private cartel that we have now.
I am an assistant manager at a Big 4 audit firm, responsible for delivering the audit on a number of public sector clients in Scotland. In Scotland, public sector audits are delivered by either private firms or Audit Scotland.
Private audit firms deliver the audit work for public sector bodies in Scotland for 30-40% less than the amount charged by Audit Scotland. Fees for public bodies have not reduced however, as they still pay the full 100% to Audit Scotland, who then pass on 60-70% to the private firm delivering the audit.
It is not accurate to say that it would be cheaper/better value to have them audit all public bodies. If private firms could tender for public sector audits outwith the Audit Scotland remit, I would expect fees would drop by 20-30% in line with what private fees currently charge Audit Scotland for subcontracting the work to them.
The question of quality is more subjective. All we can look at is Audit Scotland’s own quality report in which they note that private firms have better outcomes from independent quality reviews than Audit Scotland do. Similarly, Audit Scotland note that the private firms are significantly better at delivering the “wider scope” elements of the audit (looking at sustainability, governance, value for money, and transparency) than they are themselves.
Given the experience in the public sector – that private firms do it cheaper, and better – I doubt whether forcing all audits to be carried out by Audit Scotland (or equivalent) would lead to any improvement in audit quality, or value for money.
I note what you say but you assume Audit Scotland would not change if the remit was altered and of course it would, radically
As a result your assumptions are not valid as a basis for comparison
Dear ‘Auditor’
I have to say the I think Richard calls it right.
The private audit industry may be capable of auditing councils and the like but it cannot be trusted to audit major corporations and financial sector players where some of the biggest lies are told.
My local council was audited by a well known major audit firm who then raised issues with it publicly (and rightly so). This does not seem to happen in the City where auditing companies get fat fees for being shall we say more discreet?
The issue is not price
It’s existential
This is a flaw in the current reporting system, not the auditing firms.
Public bodies are required to publish their unaudited accounts, and then the audited ones. When we audit public bodies, we report all of our findings – even if management have corrected them – so it is clear to see what we have found, and how we have fixed it. This is necessary so the public can reconcile the unaudited and audited accounts. It also gives an opportunity for the auditor to flag areas of concern (but that do not warrant specific inclusion in the audit report in the accounts) on areas such as financial sustainability.
That is not how it works for corporate and financial services audits. There are no unaudited accounts published. If an error is found and corrected, it is never disclosed to anyone outside the company. There are no public audit papers (the public body papers we issue run anywhere from 30-70 pages). Therefore, it is assumed that auditors don’t find/do anything, that it is “covered up”, etc.
So, for example, if we found that a Council was at risk of running out of reserves (but the risk is not sufficient to warrant a going concern emphasis of matter): we would flag this in our paper and make recommendations, which would be public. If the Council did then go bankrupt because of unforeseeable matters at the time of audit, we can point to the fact that actually we had picked up on it and recommended changes (but ultimately its up to management to make those changes).
If there was a similar material uncertainty about the going concern status of a company, this would not necessarily be flagged to anyone outside the company because it wouldn’t always warrant inclusion in the audit report, and there’s nowhere else to disclose it publicly.
I think requiring audit papers which are presented to the Audit Committees of these audited companies to be publicly available would be far better than upending the entire current system on the assumption that a public auditing body would do it better, when there is no evidence it currently does. Assuming it would ‘change radically’ and that this would be better than the private firms is quite a big assumption and there is insufficient evidence to justify with any certainty that it would turn out that way – there is a comparable risk that it would be even worse quality than the current system (even if ‘more trusted’).
This change (public audit papers) would give far more information than the public/investors currently get and demonstrate the level of challenge auditors actually pose to companies. It would also flag areas of uncertainty that aren’t sufficient to be flagged in the audit report in the accounts (eg “Company X will go bust if it doesnt get an extension on loan Y, but the bank has suggested at this stage that an extension is likely so a going concern warning is not warranted, although there is uncertainty there”).
Thank you for this and the other comment I will sit shortly
I think in this one you make a useful and thoughtful suggestion that would be of real value
It is also commercially impossible that one commercial organisation could do this to another. That is why it only exists in the suit of the state sector – where no one will be suing
My concern is you appear blind to the broader contextual issues in which audit operates
‘better’ on what basis? Also, should all decisions be cost driven? Decisions should be based on long term outcomes for all not short term gains for a few.
The ‘wider scope’ elements of public sector audit are inherently judgemental, being: financial sustainability; financial management; value for money, and openness & transparency.
These are ‘outcome driven’ and do focus on outcomes for those accessing public services:
– Sustainability (can the public body continue to provide services in the medium to long term; if not, what changes does it need to make to be able to do so);
– Management (is the public body managing its resources properly; are its staff and management structure appropriate to deliver the services);
– Value for money (is the public body improving and focussing on the right areas; is it obtaining best value);
– Openness & transparency (is the public body sufficiently open with the public on its decisions and how these affect the users of its services)
Private firms have been found to be ‘better’ in terms of the understanding of these areas, the challenge we pose to public bodies on them, our recommendations for improvement and the assistance we provide to public bodies to implement those recommendations (which is limited obviously by our requirement to remain independent). The level of time private firms put into these areas (which have a far greater impact on the public than accounting adjustments) was found to be higher than Audit Scotland.
The fact that this can be done for significantly less than Audit Scotland currently charge would just be a bonus (if public bodies were allowed to tender outwith Audit Scotland).
As I have already noted on your other comment, you ae ignoring the broader contextual issues in which audit operates.
WHat you are suggesting here is that the private sector is better at commenting on issues that the private sector would deem important than is the state sector, which ahs differing values.
The point you ignore is the fact that these issues have – by and large – been established as important because the model of the corproate entity has been adopted into the management thinking of the state to which it is far from wholly appropriate, and then become used as the assessment criteria for the assessment of the state. The use of IFRS for state reporting when there is no supplier of capital and ebvery other stakeholders – whom IFRS ignores – is the ultimate proof of this.
In that context what you are seeking to illustrate is the corruption of thinking by the neoliberal agenda, not that the resultiung superiority of the private sector at private sector thinking is beneficial.
I am afraid you need to look ‘outside the box’, to use a hackneyed phrase and realise that your assessment criteria are simply inappropriate
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Nationalisation is the obvious – and easy to implement – solution. Disappointingly I doubt if politicians have the required will and integrity to do so.