Nick Huber, Accountancy Age, Wednesday 20 October 2010 at 06:52:00

Lords question whether auditors are prepared to be whistleblowers in a crisis


Senior figures at the UK?s accountancy institutes yesterday made a robustdefence of the audit industry to a House of Lords inquiry, but conceded thatreforms are necessary to protect standards and maintain public confidence in theprofession.

Their comments come amid growing support for overhauling the audit industry.

Earlier this month, the European Commission said that it was considering amandatory rotation of auditors and a cap on advisory fees. Mazars, a mid-tieraccountancy firm, has called for dual audits, while the chairman of KPMG in theUK, John Griffith Jones, has called for a code of conduct to improvecommunication between auditors and regulators.

Grant Thornton, the UK?s fifth biggest accountancy firm, has called for a capon the number of clients large accountancy firms can audit in order to reducethe dominance of the ?Big Four? firms -- Deloitte, Ernst & Young, KPMG andPwC ? and improve competition in the audit market.

In their latest session examining the audit industry following the financialcrisis, members of the House of Lords economic affairs committee yesterdaypainted an unflattering picture of the UK audit industry. Peers claimed that theaudit profession was dominated by the Big Four firms (Deloitte, Ernst &Young, KPMG and PwC); suggested that some auditors were asleep at the wheel whenauditing banks before the financial crisis; and that auditors compromised byconflicts of interest.

Lord Lawson, a former chancellor during the Thatcher government, said he knewof no examples where an audit firm had managed to ?catch the ball? that had beendropped by regulators during the financial crisis

Robert Hodgkinson, executive director, technical at the Institute ofChartered Accountants in England and Wales (ICAEW), responded to this by sayingthat his institute was working on proposals to encourage better dialogue betweenthe Bank of England, the Financial Services Authority and bank auditors.

?When auditors catch [the ball] or influence outcomes it is quite invisibleto [to the public] because of the nature of the work,? he said.

Hodgkinson added that ?professional scepticism? ran through auditingstandards like a ?golden thread?, although he admitted that in some auditsduring the financial crisis auditors should have been more sceptical.

Lawson looked unimpressed by the defence of auditor?s professional judgementand questioned whether auditors were prepared to be corporate whistleblowerswhen necessary. If an audit firm is worried that a client is taking excessiverisks, or is understating risks, would the audit firm have the confidence toalert a regulator if their client remains unresponsive, he asked?

Committee members also raised a long-running criticism of the audit industry? that the sale of advisory services, such as tax or IT, to audit clientsundermines auditors? independence.

Institute representatives argued that a ban on the sale of non-audit servicescould harm smaller businesses, in particular because they rely on theiraccountants as general business advisers.

But other countries think differently. Lawson, noted that the US has bannedfirms from selling advisory services to their audit clients, adding that the BigFour firms would not ?wilt away? if they were banned from providing internalaudit and advisory services to audit clients.

Audit firms would fight a ban on non-audit services, but concessions in otherareas seem more likely.

Helen Brand, chief executive at the Association of Chartered CertifiedAccountants, said it would support moves to broaden choice in the audit market.She also said that ?restrictive? clauses in credit agreements that force banksto choose a Big Four auditor should be removed. ?[These] covenants are probablya restriction of free trade,? she said.

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