Audit must aim higher

AT FIRST GLANCE the issues surrounding the future of the audit market, and that of the Audit Commission, are unrelated. The audit market is a huge ecosystem, where any changes to how auditors do their job will affect audit committees, regulators, investors and the global capital markets.

The Audit Commission’s effective privatisation will impact how local government procures audit services.

The one obvious link between the two is the suggestion that selling off the Audit Commission to a firm outside the Big Four could provide stimulus for more competition in the audit market in general. On that point, a £184m revenue business doesn’t exactly push BDO or Grant Thornton into the Big Four’s gaze by size, let alone the next tier of firms.

The more telling comparison comes from the concerns about who exactly are auditors’ taskmasters.

The lines are blurred. In listed corporates it’s supposedly the shareholders. But shareholders sub contract the role of tendering to the board’s audit committee.

It has been suggested that during disagreements between the board and its auditors, the audit committee will stand by the company rather than what might be best for shareholders – if it can be argued that they are distinct from each other.

Auditors are often accused of allowing themselves to be railroaded into decisions to suit the company.

Privatised local government audits could place the auditors in a weaker position than when they are appointed by the Audit Commission. These auditors currently feel empowered to issue public interest reports against local authorities when irregularities or problems are found in their financial management.

Without the statutory backing of a body that would keep them in post, auditors might find themselves pressured into diluting their reports or choosing to avoid them, rather than risk losing the audit the following year.

These issues appear to be two sides of the same coin. It boils down to: who does the auditor really serve; and how can they demonstrate they are doing the job well?

In public-listed entities it’s the shareholder. In local government audit, it’s the citizens.

As one very senior investor told Accountancy Age this week, the rules auditors follow are the lowest common denominator, they have to aim higher.

Changes to the audit market are unlikely to be revolutionary, for fear of placing the global capital markets into turmoil. But it will be fascinating to see if, over the coming months and years, whether the firms can back up their rhetoric with some solid evidence of how they show a duty of care to those under whom they serve.

This will require a mindshift. As has been pointed out by some, perhaps they should start by refraining from calling companies their “clients”. It would be a start.

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