Surely the answer is when self-interest, corporate interest and public interest are aligned.
I believe we have that alignment in the UK audit profession. Public interest demands quality audits conducted with integrity and objectivity.
Corporate (the audit firm’s) interest stems from a desire to maintain the base from which they trade – their reputation and brand. It is reinforced by the will to attract and retain good audit clients who themselves want an auditor of strong reputation and quality.
But the biggest push towards alignment comes from the potentially horrendous consequences of a significant audit failure. Many of us in the UK experienced the aftermath of the big corporate failures of the early 1990s and learnt the hard way of the potential one mistake has to bring a firm down.
A direct linkage also exists between corporate interest and self-interest because we operate as partnerships (whether traditional or LLP), all partners sharing in the success or failure of the business. That creates huge peer pressure not to take audit risks. This is reinforced by concurring review partners, technical and risk management partners and quality control reviews as well as line management supervision.
That in turn is underpinned by our partner remuneration systems which at PricewaterhouseCoopers explicitly penalise poor quality but reward higher quality work.
Above all, partners know the personal nightmare awaiting them from a serious error of judgement. The loss of livelihood, many years embroiled in litigation and a Joint Disciplinary Scheme enquiry with personal financial penalties at the end lie in store. A spectre to stiffen the resolve of even the weakest willed.
But alignment of interests is not in itself enough to secure the quality of auditing. There is an important pre-condition – the right quality people.
Modern business is hugely complex and there is a raft of legislation, accounting and auditing standards to comply with. If the people in our profession don’t have the necessary competence (and the threshold is high) inevitably there will be problems.
In the UK we are fortunate that the profession attracts top graduates because of the training, experience and wide range of opportunities it provides. We also bring in specialists who provide expert input to audits as well as advisory services to clients.
The suggestion by a small but vocal minority that auditors should be precluded from providing other services to their clients would have an immediate negative impact on the attractiveness of auditing as a career.
The quality of recruits would fall and as a result so would the quality of auditing. That is not in the interest of audit partners, firms, those being audited or the wider public.
Rodger Hughes is PricewaterhouseCoopers UK head of assurance and business advisory services
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