This quote from Radio 4’s Today Programme at around 06:50 this morning (25 October 2017) was part of a short feature suggesting that many top executives go to considerable trouble to cover up the real financial status of the companies that they represent.
This cannot be good news for the profession.
It is necessary to emphasise that all of those interviewed agreed that companies and their executives are responsible for the preparation of accounts, while auditors merely audit them to present a true and fair view. As such, the fact that accounts often require considerable window-dressing to cover big holes is not regarded as the fault of auditors.
However, if I were a partner in one of the Big Four and a handful of smaller firms, which audit companies of this size, this will not have made for comfortable listening.
If a group of our peers “confirm” that the accounts of companies like Carillion, which were deeply flawed for year after year, present a true and fair view then surely that cannot be good for their reputation or that of an industry that should be, and be seen to be, beyond reproach.
The proposition that auditors are merely there to do little more than rubberstamp accounts prepared by those representing the company will come as a shock to members of the public. They presumably invest in shares on the basis that the accounts are materially correct, as verified by a group of highly respected professionals who effectively act as their eyes and ears.
It will be interesting to learn from colleagues who practice as auditors regarding their own experiences. There seems little doubt that many will have come under considerable pressure from clients of all sizes to sign off on accounts that might be regarded as “aggressive”.
This could come in one of two ways. Many will be desperate to show that a sick company is in rude health, perhaps to stave off the bank manager or please creditors, shareholders or others with a direct or indirect stake in the business. On the other hand, it would not come as surprise to many of us to learn that smaller companies might be keen to suppress profits in order to delay significant commitments to the taxman.
If 40% of the largest companies in the country are presenting accounts that show a better position than they should, this is a terrible indictment of everybody in the finance industry. It could explain why the stock market is looking so bullish and a serious downturn might be in prospect if the authorities actually take serious action to outlaw this practice.
When I qualified as an accountant, I was taught that it was necessary to prepare and sign off on accounts that were prudent but also accurately represented the financial position of the underlying company.
Perhaps in the intervening years, the position has changed and now it is necessary to ensure that accounts inaccurately represent a far more favourable financial position for the same underlying company. If that is the case, then I apologise for wasting your time with an unnecessary article.
Thanks to the BBC iPlayer, anyone interested in listening to Dominic O’Connell’s short piece should be able to do so. It is in equal measure entertaining and shocking.