Risk & Economy » Audit » There are valid reasons why audit is a closed club

THE MAIN THRUST of the audit market investigation is towards the alleged ‘Adverse Effect on Competition’ in the provision of audit services to large companies. With 31% of FTSE 100 companies having used the same audit firm for 20 years and 67% for 10 years, a Big Four concentration, and the financial crisis not being the finest hour of the profession, there are questions about whether the current audit model meets the expectation of investors.

My organisation has not changed auditors since God was a boy, and that firm is now one of the Big Four, so I am guilty as charged, but with valid reasons. I have served under several audit committee chairs, and as chairman of a number of audit committees, with mixed results. The report states that audit firms have a self-interested tendency to focus on meeting the demands of the management rather than the shareholders, and it questions the the accountability of the auditor to the audit committee. Nonsense!

As an FD, I have never faced such a conflict where the relationship is self-serving, and any such accusations would be insulting to FDs, audit committee chairs and audit partners who must prove to have ‘responsible individual status’. I would not expect auditors to raise an issue at the audit committee that had not been discussed with me. This is not a distortion of responsibility or undue influence – it is simply good practice.

Audit partner and team rotation has worked well for me, although it has required planning. Nor have investor criticism of the sparse reporting of audit processes and under-disclosure in financial statements been a problem. I am more concerned they complain about over-disclosure due to the fears of FDs and auditors of being accused of reticence.

As an audit committee chairman, I was never blessed with sufficient time to be as thorough as I would have liked. But I was once faced with a difficult situation with a powerful FD and a less than diligent auditor. This led to the removal both of the FD and the audit firm. I acted for the shareholders – the auditor’s reporting line was irrelevant, and I involved the full board in the decision.

Where I do agree with the Competition Commission is in forbidding standard loan documentation to include clauses for the statutory audit to be performed by a Big Four firm. This is unjustifiable, especially for companies with non-Big Four auditors being constrained in the marketplace.

Some responses to this report are interesting. The commission understates the role played by the audit committee in protecting interests; large companies demand large audit firms; competition is intense and therefore effective in delivering quality. There is scant mention of company boards, chairs or SIDs. Mandatory rotation is not merited, but ongoing scrutiny of governance, standards and requirements definitely is.

As for insisting audit partners should have their reporting line strengthened, and enhanced shareholder engagement, I am at a loss as to how this would change anything other than introduce potential chaos if we rely on part-time directors to give day-to-day direction. The pragmatic view will prevail whatever the reporting line. And on the point of shareholder involvement, I always ask the audit partner and the audit committee chair to address the AGM, and I am not unusual in this.

The report does not address certain issues that it should have covered. One is the idea for audit committees to take independent advice. Mine does, and I would be short-sighted to prevent it.

Another is the question of auditors providing due diligence services which, under current practice, does not give commercial opinions unless so full of caveats that they are useless. This point is linked to the unlimited liability position faced by auditors, which is bound to limit their effectiveness. The off-the-record opinions that pass between the audit partner and the FD must be preserved, and a one-size remedy does not fit all situations. I give this report a 3 out of 7.

Last month the Secret FD visited Dubai on business, was astonished by the current boom in their economy, and also watched Deep Purple at the nine-day Dubai Jazz Festival.