A QUICK LOOK AT…

AIA is publishing a series of articles designed to take a quick look at key topics in accountancy, management and finance. Bookmark this page to update your knowledge when you can grab a spare five minutes. If you would like to suggest subjects for future articles, please contact us.

A QUICK LOOK AT... AUDITORS’ UNDER PRESSURE FROM ALL SIDES

The purpose of an audit is to provide independent scrutiny of a company’s accounts to ensure the published financial data are accurate and reflect a ‘true and fair’ assessment of their finances.  The various ways in which accounting data can be misinterpreted and manipulated makes audit a key safeguard for those investing in, or trading with a company.  Audit is a vital, but complex, service.

In the UK there has been a longstanding concern about how auditors operate since the:

  • ‘Big Four’ accounting firms (Deloitte, EY, KPMG and PricewaterhouseCoopers (PwC))dominate raising questions about how competitive the audit market actually is.
  • Auditors have to rely in most cases on sample data.
  • The audit firm may have other relationships with the company as consultants creating a potential conflict of interest for the audit firm.

There have been many audit failures recently – BHS, BT, Coop Bank, Patisserie Valerie.  However, the collapse of Carillion months after it was given a signed off audit, and the fact that all the big accountancy firms were involved with the company as auditors or consultants, has reignited the debate about auditor independence and whether the ‘Big Four’ accountancy firms need to be more tightly regulated.   Professor Sikka (University of Sheffield) is also concerned about the way audits are conducted in the context of a weak regulatory rulebook.  He feels the way audits are done, and what auditors are fundamentally there to do, needs to be looked at.

The Competition and Markets Authority (CMA) are calling for a review of the audit market in the UK.  Mr Brydon, Chairman of the London Stock Exchange, has been commissioned by the government to lead this and report back in 12 months’ time.  He has quite a task ahead of him!