PracticeAuditBringing in the public sector

Bringing in the public sector

A surprising addition to the post Enron debate has been the suggestion that a public sector body should be responsible for making private sector audit appointments in the UK.

This has already attracted the attention of leading academics who have indicated that public sector involvement would be seen as intrusive by private sector companies. There has also been a negative response from a leading investment manager and from a vote of finance directors.

The first point to bear in mind is the shareholders own the company and vote on the appointment, and the creation of an appointments board would be a disenfranchisement of shareholders’ rights. Audit appointments by a third party board would also undermine the unitary board concept which has been a key principle on which governance has been based successfully post the Cadbury committee’s report.

Listed companies have a wider disparity in strategy, operational activities and risk. The consequence would therefore be a real reduction in audit quality as appointments would be made in a much more superficial way.

The real danger also arises that it would be easier for management who dislike an auditor whom they see as over-effective to ‘pull the wool over the eyes’ of an appointments board by lobbying for the auditors’ removal.

Also, unless the appointment process is superficial, it would be too time consuming to be done properly. This would not be possible without providing meaningful information about the company’s risks and real audit needs.

Private sector companies would see this as a breach of confidentiality.

Wider issues arise. An appointments board would be seen as an introduction of yet more red tape on business, and with greater public sector intrusion fewer companies would wish to list or have headquarters in the UK. The transfer would also take place to the public sector of private sector scandal risk. Indeed there is a risk that a public sector appointment board would be accused of cronyism and actually face litigation itself.

The way forward is not to indulge quick fixes, which would undermine UK corporate governance. Instead there should be further evolutionary change based on consultation and consensus with the corporate sector and institutional investors, and continued support for the new more independent form of audit regulation, the Accountancy Foundation.

  • Martyn Jones is a technical partner at Deloitte & Touche.

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