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Harriet Russell examines why an auditor’s seal of approval isn’t always worth the paper it’s written on and explains how investors can protect themselves from the failings of a fragile audit model
May 18, 2018

From outsourcing to retail, supermarkets to telecoms, high-profile accounting misstatements have been a common occurrence for UK plc in recent years. Accompanying them have been profit warnings and, in some cases, corporate collapse. As investors ask themselves what was missed, and how these failures could have been avoided, scrutiny of the role of the auditor – and specifically the big four firms, KPMG, PricewaterhouseCoopers (PwC), Deloitte and Ernst & Young (EY) – has intensified. This is not an unreasonable line of enquiry. After all, the main reason these firms are appointed is to give companies’ financial health the thumbs up. And while the auditors don’t draw up the accounts (that’s the job of a company’s finance team), they are charged with checking their accuracy. The question for private investors is how much faith should be put in auditors to do a good enough job?

Trust and confidence in a company audit is nothing short of essential. As per the Institute of Chartered Accountants in England and Wales (ICAEW), an audit’s purpose is to “enhance the degree of confidence of intended users in the financial statements”. Investors certainly fall into this category. Again, as per the ICAEW, this confidence is instilled “by the auditor giving an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework”. That framework relates to a long list of accounting standards – which help homogenise the process – while “material respects” might explain the single biggest risk with audits in just two words.

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