City slates cheap audit trend

The breakdown of management controls in the asset management arm of merchant bank Morgan Grenfell led to calls this week for auditors to take a wider role in protecting investor and shareholder funds.

Fund managers and institutional investors said they were unhappy that cost-cutting by audit committees forced shareholders to rely on internal audit reports and checks by compliance departments to detect breaches of management controls.

‘We need a belt and braces approach,’ said one fund manager. ‘After Cadbury you would think everyone would beef up their internal and external audit function, but instead it is a low-cost commodity.’

Leading audit firms denied that the quality of their work had declined despite the competition, described as ‘cut-throat’.

Nick Land, senior partner at Ernst & Young, said: ‘I don’t believe that a high fee equates to a better job, but against that background it is a little strange, when there is more pressure on non-executive directors to put high-quality audits in place, that audit committees sometimes go for the lowest cost option.’

A Price Waterhouse spokesman agreed that companies could benefit if they increase the role of auditors. But Colin Sharman, KPMG senior partner, said there was little demand from clients for more audit services.

KPMG, which audits all Morgan Grenfell businesses, will be at the centre of an investigation into alleged irregularities involving three of the company’s funds.

Allegations centre on the valuation and type of shares held in the three funds and the extent of the holdings, which often exceeded the 10% level laid down by the Securities and Investment Board. KPMG will be questioned by investigators from Ernst & Young, brought in by Morgan Grenfell. It will also be questioned by Deloitte & Touche brought in by IMRO.

Demands for auditors to take a wider role coincide with a call by Mercury Asset Management to encourage clients to sidestep rules laid down in the Cadbury and Greenbury reports. MAM questioned the restrictions placed on entrepreneurial directors where they are the driving force behind their company’s growth.

See analysis, page 7