The virtues of Chinese walls

Splitting the Big Four into audit and financial departments should be carefully looked into as a means to avoid conflicts of interest within big auditors, a House of Lords inquiry into the audit industry heard in late October.

Dr Gunnar Niels told an inquiry by the parliamentary Economic Affairs Committee that the structural division of the big accounting firms had not been adequately explored as a way to guard against conflicts of interest.

“The option of structural separation has not been explored,” he told the inquiry.

The inquiry heard that potential conflicts of interest can arise when accounting firms provide financial services for their audit clients.

Since 2002, accounting firms have steadily decreased the amount they earn in non-audit services from their listed audit clients. But auditors continue to raise substantial non-audit fees for audit clients in the private sector.

A report into Deloitte’s audit of collapsed British car maker MG Rover found the firm’s ratio of non-audit to audit revenue was 15:1.

As the issue continues to put the audit industry under pressure to explain its level of independence and market dominance, Stephen Kingsley, director of professional services firm FTI Consulting, questions how auditor independence and commercial pressures could co-exist.

“If you take the view that public auditing is a public good, then I find it difficult how you could have a culture of public service sitting alongside one of commercialism,” he says.

This article first appeared in our sister title Accountancy Age