How tough do auditors really get when FDs argue for a somewhat creative accounting interpretation? Pretty tough, it seems. The private clashes in other people’s boardrooms are now revealed in an entertaining book.
Behind Closed Doors: What company audit is really about, allows the reader to snoop on the exchanges between the FDs in six listed companies and their audit engagement partners (AEPs). In each case the researchers – Stella Fearnley, reader in accounting at the University of Portsmouth; Vivien Beattie, professor of accounting at the University of Sterling; and Richard Brandt, research fellow at Portsmouth – looked at the ways that contentious and non-contentious issues were resolved. Interviews with the FDs and AEPs enabled them to piece together the relationships, and their impact on the audit. They found that relationships based on mutual respect tended to result in better communication and fewer last-minute confrontations.
“In these judgemental areas, a lot of the outcomes came down to the personal behaviour, bottle and personality of the audit partner, and how tough he was, as well as the attitude of the company,” says Fearnley.
The authors find plenty to praise. “We found lots of evidence of auditors standing up for themselves,” says Fearnley. One case – “Thomas” and “James” – shows how tough things can be for an inexperienced auditor. The company’s chairman and its FD, Thomas, wanted to disclose certain restructuring costs as exceptional items under FRS3.
However, a technical review, carried out shortly before the board meeting to approve the accounts, made it clear to the AEP, James, that this treatment was incorrect. A major boardroom confrontation ensued, during which the firm’s technical partner had to back up James by phone. In the end, James won the day, but he conceded ground by accepting a presentation in the accounts highlighting the group results without the reorganisation costs.
“This case involved a young partner trying to deal with a wily old FD and an aggressive chairman,” says Fearnley. “This poor chap was out of his depth, but you couldn’t really blame him because his firm should never have put him in this position. One of our key findings was how important it was to match the partner with the client. If you are dealing with someone like Robert Maxwell, you need the nastiest, toughest, most aggressive partner who won’t put up with anything.” You have been warned!
Behind Closed Doors: What company audit is really about is available from Palgrave Publishers on 01256 302699.