How does the auditing profession, whose role it is to provide such assurance, stand today? Accountancy firms take so many of the best graduates that technical weaknesses should be minimal: the training and examination of chartered accountants is amongst the most rigorous of any profession.
But there continues to be concern about auditor independence. This concern is encapsulated in the perceived pressure on audit teams (and above all on audit partners) to ‘hang onto’ the client.
One reason for this perception is the value of the non-audit services which can be sold to the client. Fees for such services are often more (sometimes much more) than the audit fee. Recent figures from the Securities and Exchange Commission show that in the United States, more than 70% of fees paid to audit firms by companies filing with the SEC are for non-audit services.
Research done by Lancaster University suggests that auditors are less likely to challenge a company’s ‘aggressive’ financial reporting techniques when their firm also provides the company with non-audit services.
In particular, the researchers found that the degree of earnings management was positively and significantly related to the ratio of non-audit to audit fees.
Independence is best maintained by shielding the audit process from any long-term pressure created by non-audit services.
For this reason, rather than seeking to prohibit their sale by audit firms, I suggest that serious consideration be given again to the compulsory rotation of the audit firms of listed companies – perhaps every five years.
This could be achieved by the Financial Services Authority, which now controls listing arrangements. On the basis of the (admittedly small) amount of empirical evidence, which I have seen, a change of auditors leads to a ‘new broom’ approach. The knowledge that another accountancy firm must take over after a fixed period is likely to encourage a more searching and sceptical audit, if only to prevent costly embarrassment in the wake of the new broom.
- Chris Dickson is the executive counsel at the Joint Disciplinary Scheme.