As the Guardian noted a day or so ago:
EU Internal Market Commissioner Michel Barnier is due to publish a draft law in November to curb what he sees as a conflict of interest when auditors check the books and supply lucrative consultancy services to the same customer.
Auditors, KPMG , Ernst & Young , Deloitte and PwC , check the books of nearly all big companies in the world.
A copy of Barnier's draft law seen by Reuters proposes that auditors be banned from offering consultancy services to the companies they audit, or even banned from consulting altogether - a move that could force the firms to split their operations.
Some of us have argued for such a split for a very long time.
And just as we need a split in the role of the banks now - and I mean a complete split, not ring-fencing - so we also need this split in the audit profession.
It remains not just wrong but ethically repugnant that firms can audit their own advice as PWC did when they advised on Northern Rocks' use of its shadow bank and then audited that same advice, with calamitous consequences for which they have not been held liable.
As a result this split is massively overdue. But more than that, when this split happens and audit firms are freed from the constraints of also auditing their own tax advice and the structures they have helped clients put in place we can expect real accounting reforms without obstacles to progress being put in their way by Big 4 auditors who in blatant breach of their public duty of care seek to defend the interests of their clients against the public good.
So we could have country-by-country reporting without the Big 4 arguing that it's a bad thing because their clients would pay more tax.
And we could demand that auditors certify that proper transfer pricing regimes were in place.
We could also expect auditors to ensure that reporting for the benefit of all users of accounts - and not those who just want to trade in the shares issued by publicly quoited companies - became the norm.
We might even see audit firms that were objective enough to undertake audits of state controlled entities - although I doubt it and am sure these should remain under the control of a National Audit Office.
And if we didn't see audit firms delivering these gains to the public as a result of this split - or we saw mere ring fences put in place between audit forms and related consultancies then there's always another option - which is to extend the function of a National Audit Office into the private audit amrket. At a time when the FSA is demanding a seat in boardrooms I really can't see the problem with that. In fact, I'd positively welcome it.
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Hi Richard,
Before stuff even gets to the audit stage, I get my accountants to do my business and personal accounts/tax returns because it’s too complex for me (otherwise why would I pay someone to do them for me!). But when it comes to submission, I have to sign to say this is all correct and the accountant has no liability if it is wrong, it’s all down to me. Surely that can’t be right either?
You can sue him / her if they make a mistake still
But you’re liable for making sure you presented complete records so yes that is right
How might you reasonably be expected to sue them if they’ve lost you all your money?
BB
Noel Scoper appears to believe that the function of an auditor is to help the management present an accurate picture of the status of an enterprise. That is NOT the function of an auditor. That is (one of) the (potential) functions of a financial advisor.
The function of an audit and auditor is to CHECK that the picture presented by the management (with/without the assistance of financial advisers) is an accurate representation of the status of the enterprise. The function of an audit and auditor is to represent the interests of the CREDITORS of the enterprise (i.e. the owners, suppliers, employees, tax collectors, and other financers), rather than the (potentially) self-serving interests of the management and financial advisers. Thus, the auditors should be appointed by representatives of those creditors (by default, a combination of the National Audit Office and the Inland Revenue), who would naturally disqualify any potential auditors who had acted as financial adviser to the management of the enterprise in question, and/or had advised ANY enterprise to use financial techniques potentially harmful to the interests of any of those creditors (i.e. including the inland revenue).
In addition to the conventional financial status of an enterprise, the auditors should also audit the deliberations and decisions of the management with regard to senior remuneration, senior bonuses and dividends, and should be obliged to comment in the audit report on the decisions made.
Based on your wishlist, an audit will take about a year to complete.
I assume the extra cost incurred will be covered by the government?
As you well know systems audits on things like transfer pricing can eb done year end: they are not year end issues
And the benefit of reduced risk would accrus to shareholders who would I am sure be more than pleased to have that risk reduced, and to pay for it
But the current “audits” have been clearly shown not to be fit for purpose. Do you have an alternative to Richard’s suggestion?
And no, the company being audited should pay. Audits are a requirement for large comapnies because of the risk they pose to the rest of society/business. Rather like getting an MOT – this is required because your car is dangerous to others if it is not functioning correctly.
the EU – democracy in action. Oh no, of course you don’t get a vote.
Maybe you didn’t notice the parliament then?
The split should not be mandatory for non public entities or non public interest entities or small companies, merely voluntary.
Lets start at the top in the listed companies,global companies,large companies and all companies in secrecy jurisdictions.
[…] accountant and economist Richard J Murphy says: “It is not just wrong but ethically repugnant that firms can audit their own advice, as […]
so the big 4 firms spin their audit practices off into standalone entities……… then what. you now have 4 big audit firms with no other line of service to support/sustain them.
few accountancy grads want to continue to work in audit once they are qualified, so these firms are going to struggle to attract employees…… they would probably have to increase salaries to attract/retain accountants…………….which pushes up the cost of an audit……..
except that everyone wants more competition in the audit market, so these 4 firms undercut each other………which means that more junior employees are engaged on the audit to try and save money………..which means audit quality drops.
genius idea.
I’ve been quite clear about the fact that I think audit of these companies is a natural monopoly requiring state ownership
It’s the only way the job will be done properly
interesting idea – although state ownership of anything dosent seem to work – HMRC and the tax gap might be an example, the NHS might be another, British Rail might be another…………….i could go on !
The NHS works amazingly well
So does Network Rail – few companies have grown as much…
You really have got that wrong
the NHS works amazingly well in the sense of the service it provides to patients – it however is incredibly inefficient and wasteful (too many middle management, ridiculous drug procurement policies etc etc). the same can be said of network rail.
If you are trying to say that these organisations are run in an efficient manner then you really have lost the plot Im afraid.
A bit like I can say Barclays is hopelessly inefficient for annoying customers
Or all banks are when transferring accounts
And failing to make payments for days when that is their basic function
Or that supermarkets who open with basic items not on sale are
Or that companies who keep me hanging on the phone for hours are
Yep, they’re inefficient by that score
But you see that’s the problem of scale – nothing to do with being state owned. I haven’t los the plot. I just opened mn eyes a bit wider than you, removed the blinkers and looked at what was going on
So: Does this mean that we need to look at the companies that these companies both do the accounts of, and audited same, to look for future problems ?
Because past experience has shown they did a poor job in both professions.
And if they have not exhibited due diligence in the commercial world why should we expect their actions in the public services to be any better ?
He who pays the piper calls the tune.
If an audit is commisioned by the management of an enterprise (who may well have been up to mischief, aided and abetted by a financial adviser), then that management will commision the auditor who argues most convincingly that they would be sympathetic to that mischief (i.e. specifically favouring the financial adviser who aided and abetted the mischief).
If an audit is commissioned by a representative of the creditors of an enterprise, then that representative will commision the auditor who argues most convincingly that they would be UN-sympathetic to mischief (i.e. specifically excluding any financial adviser who may well have aided and abetted any such mischief).