Audit reform and conflict of interest

Our CEO, Scott Henderson gives ABGI's outlook on the audit reform and conflict of interest

17 December 2019

accountancy sheet and magnifying glass

It is easy to blame auditors for company failures therefore I tend to agree with Sir Donald Brydon, who is leading a review of the sector, who said recently 'It is not auditors that cause companies to fail, that's the result of the actions of directors."

However, conflicts of interest involving audit firms also providing consultancy work has allegedly been the cause of missing accounting issues at corporate failures such as BHS, Carillion, Thomas Cook. Poor audit quality was also cited as the cause of accounting issues at Patisserie Valerie and recently Halfords.

According to the Financial Reporting Council (FRC), PwC, KPMG, Deloitte and EY all fail to meet audit quality targets. Outside the Big Four, however, the mid-sized auditors Mazars, Grant Thornton and BDO also failed to hit the quality standard.

Unsurprisingly, even the UK's audit watchdog has been found wanting. Last year, Sir John Kingman conducted a review of the FRC and recommended a compulsory levy to fund a new organisation called the Audit Reporting and Governance Authority with greater powers to sanction auditors and company directors.

Simon Dingemans, the new Chairman of the FRC, believes that it is the job of accounting firms to spot fraudulent activity in a company's accounts. He has said that an enforced separation of audit and consulting at the Big Four, if not the bigger six firms, was a critical measure to improve the quality of audits.

Meanwhile, the Competition and Markets Authority (CMA) has made wide ranging recommendations such as forcing big firms to hive off their audit practices or requiring companies to conduct mandatory joint audits.

Some of these recommendations have merit but they may not prove effective or could be burdensome for the businesses being audited. The principle of reform should be simple: to ensure auditors produce the most challenging and objective audits, accountancy firms should remove all conflicts of interest by not providing other services to the same companies that they audit.

The risks associated with marking your own homework have been with us since school age consequently there should be no tolerance given to auditors now if shareholders are to trust the sector.

There are many other niche consultancy businesses with no such conflict, such as ABGI, who have the experience, expertise and scale to support companies in specialist areas such as innovation funding.