Joint audits: distorting reality

The FRC has not even started providing guidance on ‘the use of firms from
more than one audit network’ ­ one of the recommendations in the MPG’s final
report – and joint audit is already the subject of another wave of unfair
criticism.

Thibault de Tersant of Dassault Systems complains it is difficult to
reconcile the conflicting views of two auditors in the interpretation of IFRS.
Let me provide an alternative explanation to the idea that this is another nail
in the coffin for what many dismiss as a ‘flawed’ system.

Since the implementation of IFRS, the technical departments of the Big Four
call the shots in terms of which accounting policies and methods are acceptable.

Dassault Systems is audited jointly by PwC and E&Y. One of these firms
has its technical functions in the US, the other in Europe. It is more than
reasonable to assert that the issue here is not joint audit ­ it is the debate
surrounding principles vs rules, IFRS v US GAAP, and the magnitude of the
challenge faced by standard setters in terms of global convergence of standards
(raised by de Tersant in the same article).

Joint audits are an opportunity to try and reconcile different views around
the table.

The British FD of a global corporate recently highlighted this. In his
experience, having to reconcile the sometimes diverging views of two auditors
often led to a ‘third way’ better than the two opinions initially expressed. But
to achieve this, he said, you need to lock the two in a room without a phone
line to their technical teams. He also reminded us that it is the company, not
the auditors, who prepare the accounts and select appropriate policies.

I also want to put one thing to rest once and for all ­ Parmalat was not a
joint audit. A true joint audit takes place at group level, with two firms
forming a joint opinion on group financial statements. Parmalat had only one
auditor at group level and certain subsidiaries were audited by another network.
I will not comment on who is to blame for what, but joint audit was used as a
rather convenient scapegoat.

What is most interesting is that all the attempts by those who have the most
to lose
from the development of joint audit in the UK try to discredit it on the grounds
of quality. The fact is that the number of major corporate failures where the
auditors are in the dock involve – if any – a minuscule proportion of joint
audits.

David Herbinet is head of public interest markets at
Mazars