Is the audit sector failing society?
Britain’s audit sector is “failing society”, says think tank IPPR.
In a major review of the sector, the think tank has called out auditors for coming up short while assessing firms’ governance and finances, leading to costly business collapses like the Carillion debacle. IPPR highlighted an “expectation gap” between what audits currently assess and what they would need to assess to meet public expectations.
Audit firms have been under growing pressure in the past few years. Public and investor confidence in them has taken a hit over accounting scandals and high-profile businesses like Carillion, Patisserie Valerie and Thomas Cook going into administration.
IPPR said auditors were expected to function as “trustee referees” of the UK corporate world, communicating informally and impartially to investors and society about the state of a company and whether its finances were risky. However, the think tank said actual auditing practices often failed to meet that expectation, resulting in many Carillion-style collapses on a smaller scale every year.
“Auditors should be the gatekeepers helping keep financial mismanagement at bay, yet too often they are failing to do so and are failing society,” said Carsten Jung, senior economist at IPPR, calling for profound reform of the audit sector to meet the needs and expectations of society.
Under the current legal setup, auditors are not required to flag risky business activities or questionable accounting practices before they become disasters. Jung argued that this should be made compulsory.
As well as failing to flag and challenge problematic practices, IPPR said audit firms were also failing to untangle conflicts of interest with their consultancy services, which often provide the majority of their revenue.
The think tank called for an expanded definition of ‘audit failure’ to cover not just failures to detect misstatements or fraud, but also failure to report “aggressive accountancy practices” that are technically within the rules.
IPPR economist Shreya Nanda said the current corporate finance system was failing to account adequately for risk, encouraging companies to go into excessive debt, and letting company insiders put their own interests ahead of those of workers, suppliers and pensioners and the long-term sustainability of the business. She urged the government to reform the system to stop more businesses collapsing.
Some government reforms have already taken place: the Department for Business, Energy and Industrial Strategy (BEIS)’s recent audit reform consultation introduced reforms to make directors of large companies more accountable, including fining, suspending or even taking back their bonuses if they are found to have been negligent. It also laid out a plan to water down the oligopoly of the few largest auditors.
However, IPPR called this reform “unambitious” – and warned that it would leave key problems unaddressed.