There was a lot of commentary in the financial media at the of last week on, first of all, reports that the Financial Reporting Council had reported that 29% of audits by the largest firms had not met its standards, and second that the Financial Reporting Council is searching for a new Chair.
I had comments to make on both issues. A blog originally intended, I admit, for here went to AccountingWEB instead. In it I called for an accounting revolution. The logic is that what we have at present is a system where accounts created solely to meet the needs of shareholders in quoted companies are deemed to meet the needs of all stakeholders of accounts, which they very clearly do not.
Worse, since auditing actually only requires confirmation that these inappropriate accounting standards be complied with to confirm that a true and fair view has been presented it is both set up to fail stakeholder expectations and, simultaneously, regulator hopes because an auditor who expresses judgement can all too easily fall foul of their requirements.
I develop my argument on this issue in the AccountingWEB piece, but I share this part where I suggest a solution:
"The simple fact is that both accounting and audit now require almost revolutionary reform to meet the needs of society. IFRS has to meet stakeholder needs, and if it is to meet the demands of climate change reporting it has to both put that issue in the balance sheet and make the ability to survive the transition to net-zero carbon the criteria for being a going concern in the future.
The whole logic of accounting does then need transformation to support this goal. Its purpose needs to be redefined. As my colleague Prof Adam Leaver of Sheffield University Management School and I suggested in our submission to the government’s current audit review, a new purpose for accounting must be proposed. We suggested:
The purpose of accounting is to provide the stakeholders of a reporting entity with financial statements that include relevant, reliable and sufficient information which allow them to make informed decisions.
We then related the purpose of audit to this purpose for accounting, suggesting that:
The purpose of the audit of a public interest entity (PIE) is to firstly report on whether the financial statements on which the auditor offers an opinion deliver relevant, reliable and sufficient information to users of those statements and to secondly, where there is a shortcoming, remedy that shortcoming or, if it is not possible to do so, to report why that is and what its consequences are.
This purpose would fundamentally transform audit. As it stands auditors are forced by regulation and regulators into a passive, box ticking role that confirms compliance with inappropriate accounting standards. In the approach that we suggest the auditor has a dynamic role in appraising what stakeholder need might be with regard to the entity upon whose accounts they are reporting. They would then be given the obligation to ensure that reporting need is met, whether the reporting entity wishes the required disclosure, or not."
The suggestion is in that case that the current tinkering with the rules surrounding regulation of the audit profession cannot address the failings in financial reporting as a whole that now exist.
Let me turn to the search for a new chair for the FRC. The comment I gave the FT was:
The new chair of the FRC has to combine an understanding of accounting as it is, comprehension of accounting as it should be if it is to properly serve society and the ability to reconcile the two in the interests of all the stakeholders of the accounting process. Without the focus on society, they will fail to deliver the change that's now needed.
That got translated as:
Richard Murphy, accounting professor at Sheffield university, said the new chair would fail to deliver the changes needed unless they focused on the accounting industry’s impact on wider society.
I have two questions.
The first is, what chance someone meeting that spec will be appointed?
Second, should I apply? Is it time to stop moaning that the right people don’t get the jobs and apply for one?