Our cover feature this week looks at the audit industry, which, with several-high profile corporate collapses and a string of unspotted accounting failures under its belt in recent years, has hardly covered itself in glory. We found ourselves caught squarely in one of these after tipping the failed Conviviality, while accounting errors at Tesco and SIG have all also recently caused big losses for investors. In all cases, it’s been hard to see what’s coming when rubber stamped accounts can’t be trusted.
But it is the collapse of Carillion that is sparking the most opprobrium, and rightly so. In a 100-page report published this week, MPs said auditor KPMG’s “[failure] to exercise professional scepticism” made them complicit in the collapse, and have called for the “cosy club” of the Big Four accountancy firms to once again face the scrutiny of the competition authority. And it points out that as the auditor least involved in Carillion work, PwC could “name its price” for managing the clean-up – although, as I wrote last week, it has been able to do much the same in the administration of Beaufort Securities, with not a conflict in sight.
Responsibility for this latter fiasco must surely stop with the Financial Conduct Authority (FCA), and indeed regulators have also come under scrutiny in the case of Carillion, not least the Financial Reporting Council (FRC) which is responsible for keeping watch over the audit market. That’s slightly harsh: figures show that thanks to its work audit quality is improving, and it did raise concerns over Carillion’s audit in 2015. And while MPs criticise its failure to follow up on its concerns, it is a case of David versus Goliath – the FRC’s annual budget of £36m is less than the cost of auditing the FTSE 100’s largest company, HSBC, whose audit costs £45m, and half of what the Big Four billed for Carillion-related work in the decade leading up to the collapse. By comparison, a combined £775m is spent by the FCA and Prudential Regulation Authority (PRA) each year.
If we hold to the belief that good reporting and disclosure are the bedrock upon which all financial services are built, then the balance of power needs tipping back towards the FRC, whose own budget has been static for at least three years and whose remit to improve financial reporting grows ever broader. In the meantime, investors should adopt the scepticism often absent in the cosy audit club.
