What is the point of an auditor?
I’ve been asking this question for years and no one has come up with a very good answer.
Every now and then, one of the big firms has gotten irritated enough to try offering one. The problem with their arguments is that they contradict the large number of cases in which more red flags have been lost than would be found in one of those Soviet-era military parades.
You can start with subcontractor Carillion, where the problems were obviously obvious months before the thing caught fire, and continue from there.
Lately, even the previously sleepy Financial Reporting Council (FRC), its watchdog, has realized that there is something rotten in Denmark.
Their latest report on the state of the profession only serves to reinforce the impression that these companies are primarily in the business of selling high-priced snake oil. Except this time there is a twist. A stinger in the tail that could torpedo at least one of the well-meaning worthy suggestions for making things better.
But first the bare facts. They are what, by now, we have gotten quite used to. One in four (25 per cent) of company audits in the FTSE 350 index of Britain’s largest companies failed to cut the mustard.
That should matter to all of us because these are the organizations that our pensions and other savings depend on.
Despite promises from the big four companies (KPMG, PWC, EY and Deloitte) to get in shape, only minimal improvement was found over the previous year, when the figure was 73%.
No company met FRC’s goal of having 90 percent of its work classified as good or requiring only limited improvement, which, when it realizes that the equity partners of the big four companies can expect to earn more At £ 600,000 a year, it’s a truly miserable return.
You will know the old saying about paying for peanuts and getting monkeys. This is more of a case of paying for caviar and Dom Perignon and still getting … well, you know.
It is not difficult to see why. With the Big Four functioning as a welcoming club, none of them have to try too hard. If they lose a great customer, there is always another around the corner. The downside to mandatory auditor rotation, which was expected to drive improvement by avoiding an overly comfortable relationship between auditors and clients, is that it could serve to reinforce the mindset for Buggin’s next shift among these companies.
By now, dear reader, you’re probably wondering when I’m going to get to that bite I mentioned. Here it is: the worst player wasn’t even in the big four. It was Grant Thornton, a second-tier firm.
There is a theory that increased competition would improve the quality of audits if only someone could be found to take over the Big Four. For that to work, you really need people like Grant Thornton to step up. The problem is, according to the FRC, only half of its audits pass.
As a result, you will receive “enhanced scrutiny.” That is what has been under Carillion’s auditor, KPMG. They tell us that their work has improved. But it is still under greater scrutiny. So clearly not enough.
Sometimes you wonder if the best way forward would be to simply break the system. Get rid of the auditors entirely, tell the corporate finance chiefs that a new regulator will be appointed to examine their accounts and that if they get it wrong, they are going to jump high.
But there is one thing the Big Four are really good at: telling the world why each and every reform they propose will not work / will be too expensive / will be counterproductive. So instead we get a steady stream of reports like this from the FRC and there aren’t many changes.