Don’t shoot the auditor

Companies collapse, and there are no major firms in the UK whose records are
unblemished on this issue. But suggestions that somehow UK auditing is rotten
because another company has gone bust are wide of the mark.

The latest case is Farepak, the Christmas hamper company. Ernst & Young
is the auditor in question, and the accusation at the weekend was that one
should not bother waking the auditors – ‘they’re asleep’. Well, not quite.

Some of the comment about Farepak seems ill-informed. Just because a company
lends money to another company in the group does not mean you qualify the
group’s audit, for instance. Whether or not E&Y should have seen the
company’s collapse coming is more of a moot point.

But there is a broader point here. Firms routinely draw attention to problems
in corporate reporting for which they attract little or no attention. Auditors
will, behind the scenes, spot problems that never make a public appearance.

When firms do intervene in such ways, there is little fanfare. Questions are
not asked in parliament, and leader writers do not bend over backwards to
congratulate the engagement partner on his or her work.

Audits are a complicated business, involving careful judgments about
intricate issues. Reading a business’s prospects is complicated. The question
may be that if auditors are not required to see such problems coming, perhaps
it’s the system that needs addressing.

But anyone who wants to hang the audit industry on the evidence of nothing
more than a corporate collapse and an unqualified audit should be prepared for
disappointment. It is easy to make accusations about firms. But, as Equitable
Life found with Ernst & Young, it is quite another proving them.

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