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Should auditing be a specialised function?

Over the years, there has been a growing regulatory concern around the independence of large audit firms and the recent collapse of retailer BHS has brought these concerns to the forefront once again. The one-stop-shop approach has been one that many firms have adopted, positioning themselves as a provider of accounting, audit and tax services, with some even considering the inclusion of legal services now. However, the risks associated with this approach provide a strong argument in favour of separating audit as an independent function.

An infamous example is the Arthur Andersen scandal which saw one of the largest firms in the world collapse when energy giant Enron was found guilty of accounting fraud. Despite only a small number of Andersen employees being involved in the scandal, the entire firm collapsed and thousands of people lost their jobs. It is a textbook example of the risks associated with audit and worryingly there are more recent examples that show that risk isn’t going away. In 2008 we saw the collapse of Lehman Brothers in which KPMG was implicated, and this year alone we have seen an investigation launched into PwC’s audit of BHS and KPMG’s audit of Ted Baker.

There are two key issues with the current system. Firstly, there is the issue of independence. It’s very difficult for firms who provide a number of services to a client and have a close working relationship with many individuals within that company to carry out genuinely impartial, independent audits. This creates an issue for regulators: when firms are financially invested in their clients to such an extent, the auditor can be under tremendous pressure from both firm and client.

The second issue is that when things do go wrong the impact on the firm can be colossal. Audit may only contribute to a small percentage of the firm’s revenue, but if the client is large – and well known - enough then the liability can bring down the entire firm, including all of the other service areas. It poses a disproportionate risk to otherwise successful firms, and this risk is relevant to firms of all sizes. Smaller firms can have liabilities that are much larger than their audit revenue, so when a problem arises the entire organisation is at threat.

However, the potential risk isn’t just to the firm and its employees. We have seen Christmas Saving Clubs go under as a result of audit scandals, leaving not only employees without a job before Christmas but also thousands of customers penniless over the Christmas period. Taking it a step further, if a bank such as Barclays were to go under, the far reaching implications on the general public, the economy etc. would be severe – and if Enron and the Lehman Brothers scandals teach us anything, it’s that this is not beyond the realms of possibility.

Ultimately, these issues prompt the question, should audit be ring-fenced from other operations? In light of the ongoing controversies, it is highly likely that audit will follow in the footsteps of insolvency, gradually becoming a specialised function which cannot be delivered in conjunction with other professional services. It is the only solution to preventing these huge collapses and scandals surrounding the current audit process.

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