Audit failure is not down to any one firm: the whole audit system is designed to fail to suit the interests of big business and their auditors

Posted on

As the Guardian reports this morning:

Britain's accounting regulator has fined KPMG a record £21m for audits of Carillion, the builder that imploded in 2018 and prompted a root and branch review of auditing standards.

“The number, range, and seriousness of the deficiencies in the audits of Carillion during the period leading up to its failure was exceptional and undermined that credibility and the public trust in audit,” said Elizabeth Barrett, executive counsel for the Financial Reporting Council (FRC).

”This is reflected in the financial sanction imposed on KPMG LLP, the highest ever imposed by the FRC.”

I take no pleasure in reporting this. A direct predecessor of KPMG trained me as a chartered accountant. I left in 1983.

How do I feel now about the firm? I am bemused that they still have a licence to operate.

All the Big 4 firms  of accountants have proved their ability to do some pretty shocking audit work in recent years, but none more so than KPMG, whose track record is appalling. The point has now been reached where it has to be asked whether that failing is systemic. The idea of there being a few bad apples should have been consigned to history long ago.

KPMG will, however, be allowed to survive. Fines will continue to be a cost for them of doing business. There are numerous reasons.

First, no one believes that there can be an audit market with only three major audit firms, so KPMG will be allowed to carry on.

Second, there remains a belief that there should be an audit market rather than a state regulated auditor (an expanded National Audit Office) because of the neoliberal view that markets and market operators always know best even when it is glaringly obvious that this is untrue.

Third, much of cause of recent audit failure has been the result of the deliberate ambiguity in both accounting and auditing rules. Accounting rules are decidedly flexible to permit audit clients to adopt a very wide range of accounting positions that might best show their financial activities to advantage. Auditors are legally only required to confirm that these rules have been complied with, which is what the term ‘true and fair'  is now deemed to mean. This is a conspiracy designed to result in information of dubious quality that is nonetheless deemed acceptable. Of course failures will happen when such abusive systems are in operation.

The government seems to have no desire to take on these multiple abuses, and from my experience of talking to them on these issues in recent years, lacks the technical understanding to even comprehend the issues that now need to be addressed.

And so the failures will continue because no one wants to address the core problem, which is that U.K. accounting standards result in crap data that does not meet the needs of any stakeholder of any company and auditors are more than willing to play along with this as most of the time it pays them very well to do so.

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: