Accounting - The non-existent choice

After years of intensive campaigning and political lobbying by the Big Four – both in Westminster and Brussels – aided and abetted enthusiastically by the ICAEW, the British government finally succumbed.

In the face of scepticism from the City and indifference verging on hostility from the non-Big Four auditors, proportionate liability for auditors will become law.

Announcing the latest set of regulation and statutes designed to protect auditors, the DTI said: “The draft package includes proposals on auditor liability that allow shareholders to agree to limit the auditors’ liability to the company, so the financial liability of the auditor relates to the auditors’ responsibility for the loss.”

The implication from the DTI is that after taking the advice of the directors, the shareholders of individual companies would take a vote in a general meeting on whether to allow auditors to limit their liability on a proportionate basis. This seems like a reasonable corporate governance move and a minor step towards shareholder democracy. But the Big Four have other ideas. It is clear that the power for companies and their shareholders to say no to auditors limiting their liability will simply not exist. As soon as the law hits the statute book, the Big Four auditors will send out revised engagement letters with the limited liability as a key part of their terms and conditions. Any company with the temerity to say no will be sacked as a client. And, of course, FDs have no chance of asking another firm of auditors to step into the breach. If you are a significant quoted company, you can only source an audit from four suppliers. If all those four suppliers demand the same conditions, then the idea that it is up to the shareholders is a fiction. There is no choice. The irony is this lack of choice – and the threat that another major firm could fail – has goaded the government into its proposed course of action.

But this lack of choice is not a result of firms collapsing under the weight of horrific lawsuits. Even the death of Arthur Andersen was a result of a complete loss of reputation which took place at the hands of the market, not by lawyers and judges. No legislation will protect auditors from that potential fate.

Mergers were driven purely for commercial reasons – the partners’ desire to squeeze larger rewards by merging their practices. Following the spate of mergers which culminated with the co-joining of PriceWaterhouse and Coopers & Lybrand in July 1998, the Big Four audit firms now have the quoted company audit market at their mercy.

Maybe this increasingly uncompetitive market would be worthwhile if, in return for the concession on proportionate liability – plus the introduction of limited liability partnerships which receive Royal Assent in July 2000 – the Big Four were offering something material in return.

The Forum brings together the audit profession, investors, business and regulators. Its purpose is to work together to generate policy proposals that will “further enhance confidence in the independent audit by promoting transparency and accountability”. Defining audit quality is like nailing jelly. Time will tell whether the Forum can persuade investors the audit process is safe.

Audit quality can only really be tested on individual jobs. And that’s where the FD, aided by the audit committee, has a key role to play. FDs have some responsibility to see that the auditors do a good, thorough job – even if that means pain for the FD and the finance department.

But whatever individual FDs achieve there is a much bigger issue at stake. In 2002, in the International Journal of Auditing, the respected accounting academic Tom Lee wrote an editorial entitled, ‘The Shame of Auditing’. In his conclusion, he wrote: “Public accountancy firms, institutions and individuals have to discover and understand fully what it means to be a profession … It is truly about providing service in the public interest before anything else. If a profession cannot fulfil such a mission it should not be recognised as such and there should be less severe hurdles to entry into what is really a trade or craft. If public accountants can successfully accomplish the first step of understanding what a profession is, then there may be hope for their survival as professionals. If they cannot, then the prospect of corporate audit being something more than a government function is doubtful.”

As Big Four auditors celebrate their forthcoming legislative success, they should ponder whether they really want to be a profession or a government function.