Insider Business Club: fees up, service down

Is the average FD happy with the services and the costs of their
auditors?

Jonathan Hayward, Chief executive, Independent Audit

What I am picking up from mainly the larger companies that I talk to, is that
there is an increased strain on the relationship with auditors. Not so much with
the audit committees, because on the whole auditors have been pretty good at
looking after the audit committees. But finance directors who have been very
much at the sharp end have seen their fees go up and quality of service go down,
and there is a degree of frustration building on their part.

There have been very few audit tenders in of the last few years largely due
to IFRS and section 404 which have both provided very good reasons for not
changing auditors.

But with both coming to an end, companies are now starting to think that the
cost has gone up and service levels have gone down, so maybe we should put this
out to some competition and see.

There is a lot of tender activity going on at the moment and my guess is that
there will be a lot more next year as well.

One thing I hear quite often is that the auditors are spending too much time
sitting in the audit room in front of their laptops, dashing away at something,
rather than getting out and talking to their clients, which they don’t
understand.

I have heard the same criticism from audit partners as well. I think there is
an issue there which is sometimes found to be the case. More fundamentally there
are some conflicting pressures at play.

The business model of audit firms rests very heavily on the use of relatively
inexperienced labour who are not so good at kicking the tyres and understanding
much about the way management thinks and how it functions.

After intensive reform, has the relationship between boards and auditors
improved?

David York, Head of audit practice, ACCA

The feedback I get is that, in fact, boards and auditors are quite often of
one mind and the party that is out of step is the investor community. Boards
seem to have a reasonably high confidence in auditors and auditors have a
reasonably high confidence in the financial reporting process.

This has happened during a period where we have seen a lot of new regulation.

We have seen a lot of change in financial reporting with IFRS coming in. We
have seen already a lot of change in the standards the auditors have to follow,
whether internationally or in the UK, and not only auditing standards but
ethical standards.

Of course, the bad news is that that rate of change is not going to lessen
over the next five to ten years.

Unfortunately the change in international auditing standards that was already
underway when Enron and WorldCom came to the fore is continuing apace and the
international standards setter, the IAASB, is listening to what other regulators
are saying and is also taking on board the needs of governments, particularly
European governments, through the European Commission.

So we now have a new revised European law directive for auditors and control
of auditing. That means within the next couple of years, the international
standards setter is going to have to clarify standards so that they can be put
into European law. That makes for an enormous amount of work going on at the
moment to make that happen.

Even by the time that comes in 2009 there will still be updating of standards
to go on in a few years after that.

Have firms changed their attitude to clients and to the way they
pitch?

Ian Plunkett, Business assurance partner, BDO Stoy Hayward

I was with Andersen for 12 years over the period in which the events of
2001/02 happened, so that is an experience which is engrained on the memory. I
think that marked a watershed in the relationship between the regulators and the
auditors and their clients.

There are usually two reasons as to why an audit comes up for tender, either
service levels are not acceptable or for good corporate governance reasons – an
audit tender comes along as being the way in which to exercise good governance.

Any well-run firm has always had robust client acceptance procedures and that
has been brought into sharper focus. In the US in particular there has been a
significant amount of shedding by the larger firms of clients that were deemed
not to fit the necessary risk profile, though I would distinguish the experience
on this side of the water from the US experience.

But let’s not lose sight of what an audit is about. An audit is about forming
an opinion on a set of financial statements.

Understanding how numbers get produced and how transactions get recorded is
about understanding how human beings operate and the controls over those
individuals and how they behave in the way that they do.

It is quite right that an audit has to include – right from client acceptance
through to the final audit after the year end – a good understanding of
accounting systems, processes, tone at the top, how people’s behaviour is
influenced by those that lead them. It’s not just about looking at the balance
sheet and numbers, it is about understanding how a business operates.

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