It’s time for FDs to redirect their macho tendencies. For years now one of the skills which a brusque FD was expected to have down to a fine art was the ability to screw the audit fee further and further into the ground, while, at the same time, extracting more and more consulting tasks at a reasonable rate from the same firm. However, times have changed.
The machismo must remain, but it must be redirected. From hereon in FDs have to bully their auditors into providing an ever more rigorous audit with more and more risk assessment bells and whistles attached. And then, post-audit, the FD has to go on telling everyone in the investor relations world that the audit which the company has just undergone was the best tonic the company could have had.
This is where the advantage now lies. At the end of last year, with the Cable & Wireless disclosures coming thick and fast and the company’s share price plunging, the message was clear. In an equity market which seemed to have lost all confidence companies simply cannot afford to look stupid, or worse.
So how should companies go about achieving this goal? They have to deal with the Big Four of the world’s accounting firms. These have pontificated at length on how they have changed. They will give you long presentations on how they have gained purity by purging themselves of their management consultants. Some have even had small books about corporate governance published. PricewaterhouseCoopers even had the chairman’s name on the front as one of the authors. But all these gestures have so far been empty.
And as FDs know from the experience of the past year further embarrassing disclosures are not what they want. The audit firms have to do more than just issue pompous statements. It’s up to FDs to take the initiative.
The motivation is there. All those share incentives are in ruins. And the public has finally rumbled the old chestnut of restating them to provide reward without achieving targets. The only way to earn any laurels this year is for FDs to prove that both the figures and the strategy are solid and credible as it is possible to be.
What this requires is for the audit to be used as a corporate governance tool. This may seem an old-fashioned idea, but at the moment the audit is regarded as a dull commodity. It’s worthy, but is really just a thundering nuisance and this view needs to change. It must give the reassurance which the public requires.
Both sides in the equation have to get together. They need to agree several things. FDs must give the auditors confidence that they do genuinely want a good and solid audit and that they are prepared to pay a good fee for it. They also need to push the auditors quite hard into providing a good audit. As it stands the large audit firms have got used to the idea that audit is a poorly paid line of business and that it’s therefore devalued in their eyes.
What the auditors really need to do is cease all the nonsense of seeking some specious higher ground with feeble statements about corporate governance.
They need to put some effort into the actual work itself and must talk to FDs and assure them that they too have an interest in ensuring high quality financial reporting and tight risk controls. As well as this they need to state very firmly that independence is the name of their game and that they aren’t going to put up with any window-dressing nonsense.
This is the hard part. This year is likely to be a very difficult time. Trying to make accounts look considerably better than they really are is going to be a big temptation to any board member. It’s going to be hard enough keeping cupboard doors closed as skeletons start to fall out.
But what is it going to do to the reputations of companies and the reputations of FDs? The best thing for them to do is take it all on the chin.
The mood is different. The public, as the prime minister’s wife discovered just before Christmas, is tense, worried and very suspicious. Anything that looks as if it’s a few figures short of the truth is going to be pounced upon. The best way out of this is to tell stories straight and from the outset.
Auditors and FDs may not like being bound together in this way. But the futures of both parties depend upon it. The credibility of financial reporting is what will provide both auditors and finance directors with enhanced reputations to come.
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