PracticeAuditAuditors not to blame for banking crisis, academic tells MPs

Auditors not to blame for banking crisis, academic tells MPs

Auditor role does not involve challenging boardroom strategy, Professor tells Commons Treasury Select Committee

Expectations on auditors are too high and the profession should not be
expected to avert management failure or challenge flawed business models, a
leading academic has told MPs.

Appearing before the Treasury Select Committee investigation into the banking
crisis Professor Michael Power of the London School of Economics yesterday
defended the performance of the audit industry.

He added: ‘Auditors are not there to challenge business models with finance
directors. That is not their job. For that to happen, things would have to
change substantially.’

Responding to MPs who demanded to know why, given the vast fees audit firms
received from the banks, auditors failed to act or advise regulators of the
looming crisis, Power said: ‘Auditors ultimately rely on a variety of external
sources including market prices and management.’

Paul Boyle of the Financial Reporting Council, along with Robert Hodgkinson,
executive director, technical of the ICAEW institute, and Helen Brand, of the
ACCA institute, made a robust of the limits of auditors’ power and
responsibility.

But Prem Sikka, professor of accounting at Essex University – who is a vocal
critic of audit firms — declared that ‘financial audits are out on a limb.”

MPs also raised concerns over auditors’ independence, citing examples of
firms offering non-audit work to audit clients.

However, Power declared the issue a red herring. ‘The real issue in this
debate is operational,’ he told the committee. ‘The question is: what do
auditors actually do, who does it and who do they rely on?’

Sikka, however, launched a withering attack on the audit industry,
particularly the Big Four firms.

‘Auditors are too close to the companies and they can’t bite the hand that
feeds them,’ he said. ‘How can one bunch of commercial entrepreneurs audit
another bunch of commercial entrepreneurs? That kind of model is broken and
cannot work.’

In lively exchanges, Treasury committee chairman, John McFall, asked whether
auditors had a duty of care to the wider public and whether there had been a
fundamental failure of the system that allowed the near collapse of banks
despite the attentions of the UK audit firms.

Paul Boyle, made a spirited defence of audit in the UK, although both the
ICAEW and the ACCA representatives accepted that there was ‘room for
improvement’.

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