More competition won’t change the culture of auditing

Having previously written about the serious danger presented to UK investors by the crisis of credibility facing the UK’s audit industry, I’m yet to see any serious measures taken to suggest this beyond an attempt to drive ‘competition’ in the industry. Why are authorities not undertaking a wholesale review of the effectiveness of auditing?

Late last year, luxury coffee and cake chain Patisserie Valerie shocked markets when it announced two ‘hidden’ overdrafts had been taken out in its name. From what I understand, money from that overdraft was used to create ‘fake revenue’, enabling the company to book continuous growth and inflating the share price.

Who audited the books? Grant Thornton.

Admittedly, I can’t hold GT accountable for someone secretly taking out overdrafts, but how was this able to occur? Why did the banks offering those overdrafts not ask for double confirmation? How was the CFO, Chris Marsh, able to sign the company up to these overdrafts without anyone else ever being aware? Why did Grant Thornton not recognise that this was a possibility in the audit?

I suggest that auditing as a process is apparently severely under-equipped to address issues such as this. A recent study by Accountancy Age revealed that less than a third of CFOs felt it was their ultimate responsibility to ensure that accounts were correct. How on earth is this possible? Who else’s responsibility could it possibly be?

In addition to this shocking lack of culpability, the same study also highlighted concerns among CFOs about the quality of accounting data, with about a third of UK CFOs admitting ‘concerns about errors in accounts that they know must exist, but of which they have no specific visibility’. Frankly, it beggars belief such a crucial function could have such significant issues.

These are serious challenges for the audit industry and whilst I’m generally a fan of market competition, I fail to see how splitting four dominant firms into eight smaller ones staffed by the same people and following the same processes is likely to significantly change the outcomes experienced thus far. The industry needs a total overhaul – instead of selling ’personalities’ to clients, auditors ought to be appointed on their track record of identifying errors and challenging accounts. Anything less is simply a recipe for continued accounting scandals in UK PLC.

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