Lehman and the reform of audit. Now!

One thing that the Lehman/Ernst & Young debacle has done is kick off the debate over audit once again, whether audit should be doing something different, whether the market needs reform, whether we have enough global auditors.
We’ve been here before, of course. The demise of Andersen following the Enron scandal triggered the current structure of regulation, but many would argue there is unfinished business with audit, that political ignorance, distraction or timidity, alongside regulatory dithering, failed to finish the job.
The last couple of days have seen host of proposals enter the public arena. Anthony Hilton, a former editor of Accountancy Age and now columnist with the Evening Standard, believes companies should hand their audit fees to regulators and then officials should appoint the auditor. As a result, no audit conflicts.
Prof Peter Solar writes in the Financial Times today that he believes the big audit firms need more protection from liability if we want them to keep a decent distance from their clients. Meanwhile, Stephen Kingsley, MD at FTI Consulting believes that Lehman provides the opportunity to reform audit reports so that they are no longer “the preserve of the accounting profession – they should be mandated by securities regulators” and they “should state that not only do the accounts comply with prevailing legislation and accounting regulations, but that they also make sense. Much more judgment would then have to be applied.”
All of these are interesting ideas, but I believe Stephen Kingsley is getting closer to the crux of the issue: what do we want audit to achieve? Kingsley is boldly prescriptive, but my guess is that an auditor would have a fit at an engagement letter that included phrases like his.
It’s probably right that we want auditors to use more judgment. The public probably wants them to blow the whistle more often.
But ensuring accounts “made sense” could mean anything. That said the one place we don’t want to end up is with an overly narrow definition of an audit – the very thing that people are complaining about now. There will be no easy way to get there but these ideas are worth discussing.