Comment: Only meaningful reform will be enough to solve the audit crisis

There are so many questions facing the audit sector today. What will be the outcome of the various parliamentary reviews? Will the Big Four have their audit arms broken up? Should joint audit come in? What about shared audit? Will technology solve all the current problems?

But one question nags away at me. What is the purpose of audit? There is much debate on this question, and few solid answers.

There should be a fairly obvious answer to this question. But in my interviews over the past few months, rather than getting experts talking, it has more often than not been an excellent way to keep them quiet.

Theory vs reality

The ICAEW defines audit as: “The purpose of the statutory audit is to provide an independent opinion to shareholders on the truth and fairness of financial statements, whether they have been properly prepared in accordance with the Companies Act and to report by exception to shareholders on the other requirements of company law such as where, in the auditors’ opinion, proper accounting records have not been kept.”

But audit doesn’t appear to really do that, it’s not like OFSTED ranking schools from failing to outstanding. It is, as Bob Neate, Mazars’ UK Head of Audit told me, very “black and white”.

“One of the challenges of being an auditor is if we say we think this company isn’t likely to survive, it won’t. But what about between those two points? There’s a whole range of risks, so should we be saying [our findings] in a more graduated way?”

Is the problem that auditors are such a kind, sympathetic people that they would never want to inflict harm on a company, so everyone ends up being deemed acceptable? They certainly don’t inspire the sort of fear in managers that OFSTED put into teachers. Certainly not like they used to, where the sniff of a visit would put fear into accounts teams.

This black and white system that we have at the moment begs the question, what is the point in doing an audit if auditors will always say that practically every company is doing okay?

Radical viewpoints

Conversations with Professor Richard Murphy of the Corporate Accountability Network are clearer. He believes that accounting has lost its way and is simply not fit for purpose. He argues that audits should not just provide information for shareholders, but for the whole of society. Meaning that the information provided in audits should be more useful and detailed.

Back in May, Murphy told me: “Accountancy has been corrupted in many ways. We were, as a profession, created with a public interest duty. That is why the professional bodies exist, to serve the public interest and that has been forgotten. The firms have acted in their own interests, they’ve acted in the interests of their clients and they haven’t acted in the interests of society at large.”

“There will be millions of other people who are employees, who are suppliers, who are customers, all of whom could be impacted by the well-being of that company. Just look at how many people are impacted. Look at Jamie Oliver and think how many people potentially lost their jobs,” he said.

But while Murphy has a clear idea of what he wants to see implemented, he is perceived as a radical, and his ideas are unlikely to be a unifying force.

Neate also felt there was more value to be added to the audit sector but warned that it was difficult to go beyond what auditors are required to do by law.

“You are in some way constrained by the liability environment you sit in because when you start straying outside of what you are legally required to do, you can run into all sorts of issues,” he said.

Going around in circles

With all the speculation over the potential for radical reforms, perhaps we should heed the warning of the professor of accounting, who did not want to be named, that I spoke to a few weeks ago. He argued that we have been going around in circles for decades.

He fished out some old Accountancy Age newspaper cuttings from his bag that wouldn’t look out of place today. Published in the 70’s and 80’s, the cuttings were going over the well-trodden ground of lamenting the state of audit in the UK.

What’s to say that this moment will be any different?

Yes, there is now genuine hope that we will finally get off the audit hamster wheel. Yes, there is genuine hope that parliament will act.

But first must come an answer to the question, “what is the point of audit?”. If not the problems of expectation versus reality, of conflict of interest and of scandals like Carillion and Patisserie Valerie will just re-emerge.

There is no point breaking up the Big Four if the sector is not crystal clear about what auditors should be responsible for. Indeed, if any radical structural change was implemented, what would it matter if companies like Carillion were still given a clean bill of health?

If the sector wants to get off the wheel, this question must be answered. If not, reform could be meaningless.