PracticeAccounting FirmsA lesson to learn

A lesson to learn

It was back in the mid-1990s that one of the most senior partners of the then Big Six made an admission to rival that of Joe Berardino, the Andersen CEO who conceded last year that the firm had made errors in its audit of Enron.

Auditors confessed the firm’s then head of audit, had taken their eye off the ball. Instead of concentrating on the principles of audit and accounting, his firm – along with his rivals – had been focusing on how to squeeze extra revenue from its clients.

The admission came after a string of corporate scandals that had rocked the profession and the ‘principles versus accountancy rules’ debate.

It was as if the partner, said one commentator, had withdrawn his gun from his holster and emptied its contents into both feet.

The accountancy world was, even then, still coming to terms with shouldering some of the responsibility for allowing the likes of the Maxwell and Polly Peck scandals that cost shareholders and pensioners so dear.

New procedures had been put in place to avoid what was diplomatically called ‘aggressive earnings management’. Then the problems in several company accounts came to light largely as a result of the previous recession, and the Financial Reporting Council is expected to move to remind auditors to be on the lookout for such techniques again.

In other words ‘keep your eye on the ball’ is as relevant an instruction now as it was then.

The trouble is, investors and pensioners could be forgiven for thinking that the eye has not only drifted off the ball, it’s not even on the same pitch.

So the ICAEW has now issued a detailed publication on how an audit should work, though of course it has taken the opportunity to remind us of an audit’s limitations. The tome warns against cosy relationships between auditors and their clients, instead advocating mutual honesty and respect.

At the same time it reminds readers that an audit is not a certification of the accounts, merely a true and fair view of the business.

Like auditors, investors should not take their eyes off the ball, and accept the constrained role of the audit – they should also keep a keen eye on the management and its system of controls.

But auditors cannot duck their responsibilities – they are the investors’ first line of defence and should challenge senior management teams at all times.

And keep their eye on the ball.

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