RSS feedsFor some businesses, audit can be preceded by a string of four-letter words. But if companies box clever, the process can be more about professionalism and less about profanity. Audit is at a crucial juncture in the UK, with a raft of sweeping changes in the pipeline. Whatever happens, there’s only likely to be one winner – your accounts.
The process of laying your books open can be the accounting equivalent of the dentist’s drill, which emphasises the importance a good relationship between the auditor and client can play in numbing the pain.
Edward Middleton, an assurance and advisory partner at PKF, believes it is crucial to get the fundamentals right to pre-empt any sticking points between you and your auditor mushrooming into serious obstacles. ‘The key thing is making sure the right information and documentation are available to the auditor at the start,’ he says.
Middleton says it is not uncommon for a client to make such basic errors. ‘It is not abnormal for information to be missing. It might be a set of draught accounts or working papers or answers to unavoidable questions. The client needs to be clear on timetables and processes because this makes the auditor’s job easier. Generally speaking, an auditor will always say to the client, “let’s make sure the relevant information is there”, but hurdles can still arise.’
David Herbinet, head of public interest markets at Mazars, says: ‘Companies need to get the risk management and internal control aspects right. These are key features. If they are in place, then the audit can be relatively easy.’ But while the client-auditor relationship is clearly subjective, certain factors are still needed to get the best out of the audit process. For example, chemistry between the management and auditor is fundamental.’ says Middleton. ‘It’s difficult to pinpoint other specific criteria a client needs its auditor to meet because every job has its own singular characteristics, but clients setting out exactly what they want in terms of audit and additional services is paramount, so the chemistry must be there.’
Herbinet believes most auditors have the same level of competence, but stresses that a personal fit between auditor and client is important. ‘With personal fit, meaningful discussion becomes possible. There is a fine balance between open and robust debate, and knowing where to draw the line, but that’s what companies are getting less of these days because of tougher regulation.’
Middleton offers his own take on how to achieve the necessary balance. ‘It’s a question of practice, experience and judgement, and knowing where to draw the line; for example, the extent to which an auditor is able to prepare accounts as opposed to just auditing them.’
The long-running dispute regarding audit choice and competition still rages between the Big Four and the mid-tier chasing pack, which means the real winner is likely to be the client as firms make a greater effort to retain their clients.
Corporate governance reforms have increased restrictions on the non-audit services that a firm can provide. They have received a mixed reception as the traditional role of the auditor has been given another significant overhaul. Herbinet supports the change as critical if the audit market is to become less concentrated. ‘I think the rules which limit non-audit services are very good, but it’s a bit of a shame we had to end up with a rules-based approach in some respects, but I think it’s a good way to have a more open market and fairer pricing because some auditors are less able to win audit work.’
In terms of a more competitive audit climate, the pendulum is swinging in favour of the businesses as other key legislative changes are being hammered out. Recently, opinion has been split in the audit community as a last-minute amendment to the Companies Act has demanded that the FRC’s Professional Oversight Board provide audit committees with detailed reports of the companies it puts under the spotlight through the Freedom of Information Act.
Currently, the POB does not name audit firms or companies it has inspected and publishes results of inspections only in the form of a general report. When the move was announced, POB director Paul George responded: ‘We’re not convinced it (the Act) is the right mechanism to determine whether a body should be subject to the FOI.’ But this could lead to a revolution rather than an evolution of the traditional auditor-client-audit committee relationship.
Some mid-tier firms have argued that not only is their audit work comparable to the Big Four’s, it also blames the largest firms for some of the problems mentioned in the current anonymised reports. Indeed, they believe that anonymised reports fuelled the idea that a Big Four audit is more reliable than those from other firms. Ministers argued that audit quality reports on the work of major accountancy firms would otherwise remain private, with the publication of ‘only the blandest summaries, despite the requirement under corporate governance rules for the audit committees of company boards to make judgments about the effectiveness of their auditors’, says opposition Treasury spokesperson Baroness Noakes.
‘You have to draw the line before you overburden the audit committee and put them in, a position where they are second-guessing the finance function, says Middleton. ‘Personally, I don’t have a problem with greater transparency of audit operations, but this could see the audit committee unable to give an overview because they have become subjective.’
But is the audit landscape likely to change significantly, even if these new initiatives are greenlighted? Oxera laid bare the extent of the Big Four’s stranglehold on the audit market for FTSE 350 companies, identifying the fallout from the Enron scandal as a major contributor. Arthur Andersen’s implosion reduced the Big Five to Four, but only resulted in the remaining quartet scooping up Andersen’s lucrative clients. This was attributed to one key facet – reputation.
Oxera believed it was an important driver of choice, favouring the Big Four, based on real or perceived differences with the mid-tier firms. The consensus seems to be that the Big Four were better placed to offer two key components of the audit product: value-added services on top of the audit, and insurance against catastrophes and reputational risk.
Switching rates were low (about 4% on average for all listed companies), and competitive tendering did not occur frequently, so the outlook appears less than rosy for the mid-tier and its efforts to bridge the chasm between itself and the Big Four’s audit operations.
But Herbinet forecasts that the audit market will undergo a significant shift towards greater openness, but it could take time. ‘I think the market will change in the next 5-10 years. We’ll have an open market with a lot more players and greater transparency. My hope is that it will happen soon, but my fear is that it won’t. The barriers that still exist are very strong and it will be a lot of hard work to break them down.’
