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Auditor liability – up to a point.

The collapse of Andersen amidst the wreckage of Enron looks likely to bring about one result that accountancy firms – and the Big Four, in particular – have long awaited. After a 10-year campaign, a cap on auditor liability appears to be within reach. The UK government looks set to grant the firms their wish for one simple reason: it has finally cottoned on that the prospect of the Big Four turning into the Big Three is unthinkable.

So, ironically, those global behemoths, in the UK at least, have become a protected species.

A consequence of the introduction of an audit cap will be to shut out the realistic prospects of any break in the stranglehold that the top boys have over the quoted sector audit market.

The French, meanwhile, have reacted to Enron et al by boosting their long-established system of joint audits. A law in France is being introduced that enshrines the idea that one auditor should not dominate.

Although the idea of joint audit was floated here briefly last summer, the idea never took hold in Anglo-Saxon minds. But one Scottish-born financial director of a European 300 company has supported the idea of joint auditing. In a letter to the European Commission – seen by Financial Director – he wrote, “This choice of joint auditing seems to offer us the best guarantees, even more so in the current environment.”

The FD, who has seen at first hand the auditing of both a Big Four firm and a mid-tier firm, Mazars, told the EC, “We believe that the difference between the Big Four and other auditing practices only lies in the geographical area covered by these firms. Mazars has gained our trust and that of the shareholders of many blue chip French companies operating internationally.”

The ringing endorsement is clearly music to the ears of Mazars, the firm with its origins in France and which puts its name – along with that of a fellow auditor, of course – to 25% of the Paris stock market’s CAC40 index.

John Mellows, Mazars UK senior partner, says the joint audit debate merits more serious attention in the UK at a time when competition in the audited quoted sector seems to be veering toward zero. “In a way, we’ve got to be better (than the Big Four),” he says. “We’re appointed because we’re good, not because we’ve got the name.” For Mazars, the join audit is a spur to quality because on every audit another set of auditors is intensely aware of the work that is being done by a rival. Such scrutiny improves performance.

Mellows’ colleague, David Herbinet, rejects the common criticisms that a joint audit is an audit that is done twice or is little more than a fancy name for a peer review system. In practice, the two audit firms allocate the workload, depending on particular strengths and competencies.

Each firm will do its own planning to deal with the perceived business risks and then will bring to bear their own audit approaches and methodologies. The work will be reallocated over the years between the firms.

The key part of the audit is the conclusion and the completion. The firms exchange summary reports of their findings, the issues that were found, the discussion with management and how those issues were resolved.

By having two firms involved, Mazars says there is a better quality debate on the key accounting and auditing issues, and firms are likely to stiffen each other’s resolve. When an FD is faced with two firms that are agreed on an issue, he or she is less likely to win the day. As for cost, fees are realistic but are value for money. If there is any fee duplication it is at the planning of the overall approach and sign-off stage, debating issues such as accounting policies. These are the most sensitive areas of an audit and so deserve the greatest amount of thought.

But while Mazars may have some valid arguments, it’s hard to see who in the UK will offer it a joint auditship. Only nine of the FTSE-350 have a non-Big Four audit, and only two have a joint audit – in both cases, a KPMG/PwC combination.

There may be one ray of hope for the non-Big Four. Under the Smith proposals, the audit committee will have the right, and the budget, to get its own independent accounting and auditing advice. Perhaps more realistic than the possibility of becoming joint auditors, those firms with the right experience could work as accounting experts to audit committees.

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