PracticeAuditAudit shortcomings ‘hard to miss’ but solutions prove elusive

Audit shortcomings 'hard to miss' but solutions prove elusive

The House of Lords report into audit is replete with examples of auditor shortcomings and oligopoly, but solutions to problems are harder to pin down

WITH A combined age spanning several centuries, five lords settled behind a carved wood table to deliver their verdict on a profession that has changed little during the last 150 years.

The Lords committee members, among them former chancellor Lord Lawson, delivered their findings with a certainty that revealed the depth of feeling behind accusations of complacency and slipping standards.

Their criticism of the lack of dialogue between bank auditors and regulators during the financial crisis was confident, accusing them of a “dereliction of duty” that extended from auditors to the Financial Services Authority.

Auditor oligopoly was roundly attacked, and the Lords pointed to the possible collapse of a Big Four firm as a worst-case scenario that strikes fear into the hearts of all stakeholders.

International financial reporting standards (IFRS) were harshly attacked, and the report claimed the new rules pushed the banks deeper into crisis, recommending IFRS should not be adopted by medium-sized companies.

Here the Lords seemed less comfortable with questions from the audience, admitting the international scope of the standards made it hard to enforce change. However, they firmly insisted an inquiry into IFRS would make a “major contribution”, saying “you’ve got to start somewhere”.

The Lords’ answer to all challenges was an investigation by the Office of Fair Trading, meaning their recommendations will take time to come into effect.

Lord MacGregor admitted some of their suggestions – such as mandatory audit tendering every five years – might fail to break the Big Four’s dominance, but said this reinforced the need for a thorough investigation by the OFT.

Lord Lawson was predictably vociferous on the question of improving dialogue between auditors and regulators, and here there was little dissent from audience members.

Stakeholders have held their hands up to shortcomings in this area, and responses to the inquiry are stuffed with examples of stakeholders’
pre-emptive moves to address the issue.

When asked why it took so long for audit role and concentration to be examined, Lawson was quick to point to the transfer of regulatory authority from the Bank of England to the FSA in 1997, saying discussions between the two acted as a drag.

He said improving dialogue was “like pushing at an open door” and a rapid solution in this area is at hand, but warned answers provided by an OFT or Competition Commission inquiry will be longer in coming.

 

(Picture ©Iain Winfield/Incisive Media)

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