Top firms launch search for bigger role in company audits

Senior auditors are organising a rearguard offensive following attacks on their relevancy and competency in the wake of the financial crisis.

Figures within the top six UK accounting firms want to audit the “front of the book”, where companies outline their business model and risks.

However, they claim that any expansion would make the profession vulnerable to litigation and have to be matched with reform of auditor liability measures.

Senior figures within the ICAEW are already hoping to look into the issue and “start a discussion” with investors, companies, and regulators about the future role of audit.

Since the crisis and collapse of US bank Lehman Brothers questions have been raised about the relevancy of audit.

Last month, a damaging report by the US bankruptcy court into the collapse of Lehman Brothers found the bank used “accounting gimmicks” to manipulate its balance sheet position.

A Treasury select committee report last month said this demonstrated how audit reports “can seemingly omit crucial information”.

“The current audit process results in tunnel vision, where the big picture that shareholders want to see is lost in a sea of detail and regulatory disclosures…We call for progress on our earlier recommendations, to ensure that audit reports are an effective tool for investors,” the committee said in its report.

This followed earlier comments during October, 2009 when investor groups including the Association of British Insurers and the Investment Management Association said audit reports only reveal the “minimum” and are “overly legalistic”.

Steve Maslin, chair of the partnership oversight board at Grant Thornton, said the current reporting model “doesn’t go far enough in the modern world to give users all the information that they are entitled to”.

He said: “We can’t just say ‘there has been a crisis – it’s nothing to do with us’.

“There is a pent-up desire from users to get even more relevant and useful information in accounts and if there are going to be more reliable disclosures there needs to be some assurance.”

He believes there is little recognition of the good work done behind closed doors.

Pauline Wallace, head of public policy and regulatory affairs at Pricewaterhouse­Coopers, said auditor liability had to be discussed alongside any debate about expanded assurance work.

“If you are going to go further and provide assurance around non-financial information then there is a need to make sure auditors are not subject to far greater litigation,” she said.

She added that auditors’ positive impact in the financial system often goes unacknowledged. “We suffer from the classic problem – people don’t
really understand what we are doing and it is not terribly sexy. It’s only when there is a problem that it comes to light,” she said.

“We should have a much more open debate about what it is people want… the question I would ask investors is ‘what is it exactly you are searching for’.”

A number of academics have already begun studies into the subject and there are early signs the ICAEW may sponsor research.

Any substantial changes, however, would need to be undertaken in conjunction with the Financial Reporting Council and the government, to be effective.

IN OUR VIEW

Auditors will claim that their proudest moments will never be reported on. The meatiest rows and arguments take place behind closed doors. However, in the post-crisis world auditors’ work needs to be seen to be done,
and perhaps, with this in mind, there is an argument to expand their assaurance measures to the front of the book.