Auditors must treat shareholders as their client

AUDIT IS FAILING companies because the profession still considers the company board as their client, rather than shareholders.

The claim, by Hermes Equity Ownership Services director Paul Lee, came today at an ICAS/Grant Thornton event in London on the future of assurance.

“The profession doesn’t feel it works for shareholders… because of this, the whole process isn’t working for the shareholders. It’s in your hands to change this,” Lee told the audience of audit stakeholders.

“Competition is on price, not quality. We need to change the mindset that the audit is an annuity – a guaranteed cashflow. That’s a real concern.”

Brendan Nelson, RBS audit committee chairman (pictured left), warned that audit could be perceived as a commodity but disputed calls for mandatory rotation of audit firms over concerns about cosy relationships leading to a lack of audit scepticism.

“I don’t see any evidence of [a lack of scepticism],” said Nelson.

Forcing boards to choose new auditors effectively undermined the ability of non-executives to best represent shareholders’ interests.

“This is a vote of no confidence in [non-executives’] governance.”

Focus should instead narrow to making annual reports more digestible and useful for investors, Nelson added.

Grant Thornton partner Steve Maslin called for the creation of an investor-led body to monitor the audit market. This body could intervene to strip a proportion of FTSE 250 audits away from the Big Four to reduce concerns over competition.

“While the Big Four would lose market share, it would impact on less than 1% of their turnover,” said Maslin (pictured right).

As a firm, Grant Thornton believes it would take just £30m of inward investment for it to be able to handle a share of the FTSE 250 audit market.

ICAS president Alan Thomson said that in his role as a chairman of a private equity company, he had been forced to choose a Big Four auditor due to a banking covenant set by its lender. “That’s not right,” said Thomson.

Ernst & Young partner and ICAS past president Douglas Nisbet, setting out ICAS’ Future of Assurance document, said that the annual report must deliver a “coherent story”.

“The board should set out the rationale and examples of why their business is a going concern,” said Nisbet. “There should be an explicit opinion on that from the auditor.”

The front half of annual reports should contain information on the company’s ability to operate as a going concern. Rather than auditors signing off such as statement with the traditional “true and fair view”, the audit opinion should instead be known as “balanced and reasonable, added Nisbet.

PwC head of assurance Richard Sexton defended the profession on a number of the points raised during the debate. He said that concerns of a lack of scepticism flagged up by the Audit Intelligence Unit were not necessarily accurate.

“Nowhere in the AIU reports is the word scepticism used,” said Sexton (pictured left).

He also said that shareholder engagement by auditors was maintained by shareholder representatives on the boards – namely non-executives.

But he called for change, including an increase in investor involvement and a greater level of transparency in corporate reporting. His main concern was that too much change would “undermine confidence” in the UK as a place to do business.

The debate was chaired by ICAS chief executive Anton Colella.