Is auditing in danger of losing its validity?

Independent audits are the norm in areas such as hygiene, taxation, customs and excise, health and safety and trading standards. All are conducted by independent teams which are neither hired nor appointed by directors.

Visits from such auditors are always respected, even feared.

Company financial audits are a different matter altogether. No one fears them. The more financial audits fail in the private sector, the more Government forces them onto the public sector. Rather than looking to develop effective control or ‘real time’ audits to cope with an era of instant quality service, ‘ex-post audits’ are in the ascendancy.

Audits are becoming part of public relations and impression creation.

Having an audit is prestigious, so the bigger the name of the auditor the better. Little is asked about what it delivers or for whose benefit it is being done. The existence of audits might provide comfort to distant stakeholders. Yet they are also a means of fobbing off inquiry and involvement.

Audit really legitimises the prevailing power structure and status quo rather than throwing it open to scrutiny. Instead of creating dialogue between the internal world of business and the external world of a share-owning democracy, audit curtails it. Audits have become a major weapon in the shift of power from doctors, engineers, teachers and managers to ink-stained accountants.

What does society get for the millions it pays out in audit fees? If the auditing firms sold television sets and the product failed with the regularity of audits, the producers would be forced to redesign and improve the product by examining the reasons for failure. If, despite producer claims, their televisions still gave pictures which were neither true nor fair, there would be outcry, the producer would go bust and the Office of Fair Trading would prosecute. Yet audit firms are exempt from any fair trading laws. They enjoy statutory monopolies, but have no ‘duty of care’ to individual stakeholders. In any market economy, the producers of faulty goods should go bust, but producers of the failing audit products want even more protection from the consequences of their own failures.

The correct response to failure is to examine the basics. This has not happened in auditing. Instead, the industry has used corporate failures in which it is implicated to expand its fee-earning opportunities.

The industry has exploited the Maxwell, Barings and BCCI failures to market more and more bolt-on services.

Audit failures do generate talk about the audit product. But rather than examining the substance of audits, debate has focused on procedures.

New standards may help. But they do not address fundamental questions about the nature and usefulness of audits in a ‘stakeholder society’.

No one asks why it is that despite multiple ethical codes, auditors continue to have conflicts of interests, or why, despite promises of better audits, they are rarely delivered. Audits may have passed their sell-by date. We should think about the problem and see if we can’t devise audits which serve the public interest better and provide an effective means of accountability.

Austin Mitchell is Labour MP for Great Grimsby