The closeted world of audit accounting, where the nearest they usually get to excitement is swapping dark grey socks for the light grey variety, is under siege.
The latest salvo came from asset manager Alan Miller, who described the UK’s accounting watchdog, the Financial Reporting Council (FRC), as ‘amateur’ and ‘unable to see the blinding obvious’. This follows the chair of the U.K. competition and markets authority, Andrew Tyrie, characterising the audit process ‘as money for old rope’ as he signalled a full-scale probe of the big four accounting firms.
Pressure on the FRC has been building steadily since the beginning of the year, when it was accused at a parliamentary hearing of being “toothless” and “useless” following a string of high profile corporate collapses, such as that of the construction company Carillion. Criticised for being too cosy with business and a sinecure for senior executives from the big accounting firms, the watchdog is already facing a government inquiry chaired by Legal & General Chairman and one-time FT columnist, Sir John Kingman, who was confirmed in post by Business Secretary Greg Clark last week.
Perhaps in anticipation of the mauling to come, the FRC’s embattled chief executive staged an offensive of sorts earlier this month, as he floated plans to require both the front and back of companies’ annual reports to be audited. Presumably in the expectation that this would buttress the fraying confidence that investors, government, suppliers, pension holders and employees have in company reporting. At the moment it’s only a company’s accounts in the back of the book that are formally signed off by the accountants, so corporate commentary on strategy, risk, customer service or product performance is typically for the company itself to determine.
The circular notion that the solution to recent audit failures is greater amounts of auditing, is one worthy of Kafka if not Monty Python. Yet however myopic the proposed cure, it does beg a serious question about how we maintain trust and confidence in business when it’s in such vanishingly short supply. Traditionally the imprimatur of an accounting firm declaring your accounts to be ‘true and fair’ carried the collective weight of the entire profession behind it. In common with many other institutions however, the accounting business is now leaking authority with potentially profound consequences for the trust we take for granted at the heart of our market economy.
The recent introduction of integrated reporting was supposed to give us the mechanisms by which we gain a better appreciation of all the value creation levers and risks associated with a company, encouraging a longer-term view of its sustainability. Yet it’s the short-term sustainability of companies’ accounts where issues have arisen. Too often it appears that accountants are either unable or unwilling to challenge a company’s interpretation of the facts, reinforcing the perception that auditing is too often carried out by junior staff without the nous or gravitas to hold companies to account.
Anyone with even a passing familiarity with accounting will know that the presentation of a company’s accounts is far more subjective than might be assumed. The revenue recognition issues that have dogged much of the outsourcing industry of late, or indeed Tesco some years ago, are a case in point. This makes the question of trust a central and strategic issue for the accounting profession, because in essence it is selling confidence.
One solution might be to make the audit process more transparent. The debates about revenue recognition, contract impairments, or pension fund contributions might then be summarised for all to see, leaving people to make up their own minds or to take a more conservative view if necessary. At the moment the bean-counters are required only to declare that the statutory accounts offer a true and fair reflection of the company concerned. Perhaps now is the time for them to show us their workings.
