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Is auditing so difficult?


Why do auditors, including industry leaders, fail to do the basics so often? In their latest polemic, the Imprudent Accountant argues that substantive action is urgently needed.

1st Sep 2021
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I would not claim to be an expert in the discipline having forsaken auditing long ago but, as far as I can recall, it was a relatively simple matter of proving that long columns of numbers added up and balanced.

Therefore, I find it difficult to understand why Big Four experts seem unable to complete projects without provoking outrage on a regular basis.

If nothing else, the likelihood is that most of these people have Oxbridge degrees, professional qualifications coming out of their ears and IQs that are almost off the scale.

Within the last couple of weeks, two out of the Big Four firms who dominant FTSE 100 audits have each been fined millions of pounds as a result of “audit flaws” that appear both inexplicable and inexcusable. Meanwhile, the accounting watchdog has taken KPMG to task over 'misleading information' in regards to its audit of Carillion. 

The only explanation is that the stars of our universe are:

  • Inept
  • Corrupt
  • Stupid
  • Lazy; and/or
  • Weak

The Financial Reporting Council appears to have lost the plot. While it issues fines and makes bold statements about future conduct, nothing ever appears to change.

We need real action

The government regularly makes encouraging noises about change but also seems to step back from the brink whenever it looks as if there might be real action.

It could very easily be argued that failures by auditors have cost the public and the country billions of pounds and that is completely unacceptable.

There have been suggestions from independent bodies that at least one of the major firms should lose the right to audit. That could certainly have the desired effect, although it could come with a hidden consequence.

Quite frankly, performances from all of the major firms have been so bad for year after year that if one got banned, the others might easily follow suit, meaning that nobody was licensed to audit any major corporate, whether competent or otherwise.

Perhaps a slightly more sophisticated approach would be to attack individual partners. This could be two pronged.

First, they could face the kinds of fines that might make a difference, rather than have little more impact than a rap across the knuckles.

Secondly, they could have their practising certificates withdrawn either for a lengthy period, say five years, or permanently for really egregious examples of malpractice.

We regularly see situations in which crimes have been committed. There has to be a prospect that in some cases the CPS may take the view that accountants have conspired with the criminals. This could lead to court appearances and conceivably even imprisonment.

However, until there is a far stronger response to substandard work most auditors seem to believe that they are immune from any serious penalties and happily toddle along collecting outrageously large fees without bothering to do the job properly.

It would be great if one of the leaders in this field could publish a response, refuting the allegations in this column and explaining why their practices are industry-leading, world beating and deserve to be applauded, rather than derided. I’m not holding my breath.

Replies (15)

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By ireallyshouldknowthisbut
01st Sep 2021 18:21

Back when I was in audit it seemed to be about sitting in a room trying to explain in abstract terms why the business was all OK, rather than actually getting out there and talking to people and finding out why it wasn't. If you did the latter, you went over budget and got in hot water with the partners and client staff. If you did the former you got praised and promoted for finding ways of rubber stamping the accounts and extracting a large fee from the client.

I decided to leave in my 3rd year when the partner ripped out a large section of the (then paper) audit file as I had had the audacity to find a material stock issue that had been missed for years as it hadn't been spotted before. I was told to go back and do what they did last year, which didn't pick it up.

Thanks (3)
Replying to ireallyshouldknowthisbut:
By Iamarobot
02nd Sep 2021 14:40

That happened to me when auditing a listed multi site retailer for our London office. They used staff from the regions because they were cheaper.
The stock pricing test compared the cost per unit to the database price. Amazingly they were the same!
I decided to use my audit training to compare the stock prices used in the year end valuation to the unit price on the purchase invoice.
The result was that the purchase invoices priced items in packs of 10 or a 100. This bulk price was used in the database. That meant stock was over valued by either a factor of 10 or 100.
The result was that I was thrown off the audit, the accounts were signed off without any changes and the plc went bust a few years later.

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Replying to Iamarobot:
By ireallyshouldknowthisbut
03rd Sep 2021 09:40

Sounds about the same. I audited the second biggest stock location. Biggest one had been done to death. Second location has no stock take, no procedures. I did a spot check (print of stock list, borrowed a forklift driver to show me where it was, depo manager was going mental when I asked, but I said I was doing it, and he gave in) anyhow we couldn't find the stock where the computer said it was. I went in the coffee room at break time and I have about 6 drivers moaning that the computer was wrong, and they had to just pick "anything" off the shelf to fufil deliveries. I did a 'dirty count' by just counting how many in a rack down a couple of lanes and reckoned it was about 1/3 full. Computer said 90% full.

Wrote all this up, thought I was going to get a gold star, and instead got a dressing down for going to this other site without permission, upsetting the warehouse manger and 'asking awkward questions", not sticking to the audit plan etc.

This was a listed company being bought out, so all very material. Other site was of course perfect.

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By adam.arca
01st Sep 2021 21:33

I don’t know where the OP trained but, when I trained in audit in the 80s, there was substantially more to it than adding up long columns of numbers. Auditing for understatement, anyone? Perhaps the OP could cast us a few pearls of wisdom on how you check for something that isn’t there.

There’s no doubt that the antics of auditors make defending the profession a difficult job but my take is that audit is a fundamentally difficult concept to explain to the layman and will always be a shades of grey thing.

My experience is that frauds are never actively found but are merely stumbled across, and much more often that not they’re stumbled across internally and not by the auditors. That being the case, we need to get away from this modern mania of making the auditor responsible for everything and let them get back to the primary role of encouraging people to stay on the straight and narrow by their presence. Bring back the auditor is a watchdog and not a bloodhound is what I say!

My other audit experience was realising just how long it takes to get a grip on complex organisations. In year 1, you’d think you’d done a decent job, only to come back in year 2 and think “how the hell did I miss that last year?” Only in year 3 did it feel like you were getting on top of things.

So, yes, auditing is difficult if done properly and it doesn’t help that people who know sweet FA about the subject still feel free to weigh in with their opinions.

My recipe for audit reform would be for auditors to do less, charge a LOT less, and for users of accounts to stop using the audit report as a rubber stamp of accuracy on absolutely everything (which would require legislation to roll back some of the more recent case law and is therefore never going to happen, unfortunately).

Thanks (1)
Replying to adam.arca:
paddle steamer
02nd Sep 2021 23:19

I concur, audit scandals these days tend not to be things picked up by casting documents/schedules/printouts, they are more re valuation issues and often these and other problems are internal control issues. For instance bank accounts opened secretly, how were they not spotted, reviews re long term contracts, understated creditors, where is the trail and control re goods /services received, authorised purchase orders and the ledgers?

Large entities have internal audit, what are they doing all year, drinking coffee?

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Chris M
By mr. mischief
02nd Sep 2021 10:33

Having worked in audit and in industry, auditors have no chance. The people in the business know exactly what they need to do to get the job done, and how to make the auditors look in all the wrong places and ask all the wrong questions. Add in the fact that many audit partners are close acquaintances if not friends of the FDs, and the whole setup is guaranteed to produce dodgy audits and big collapses.

£30 billion was the highest mis-statement I saw during my career in industry, but the odd few million was totally routine.

What we really need are MUCH tougher - including the prospect of personal asset forfeit and jail - sanctions on the directors of PLCs where frauds have taken place. Whereas, normally when these things come to light they all run away from the responsibility at 100 mph and try to finger the little guys lower down the line.

Thanks (4)
By Paul Crowley
02nd Sep 2021 11:58

Because finding fraud is difficult
Once commenced, this year with the fraud looks like last year with the fraud (not noticed) so everything is consistent.

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By optimist
02nd Sep 2021 12:09

In other news, someone with little to no knowledge of audit beyond basic work as a student accountant has an opinion on audit

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By Rgab1947
02nd Sep 2021 12:15

So the people in audit here defend the profession by slagging off people commenting about audits.

That really solves the problem in audit and a problem exists.

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Replying to Rgab1947:
By adam.arca
02nd Sep 2021 18:48

You’re conflating two separate, albeit related, issues.

No one is defending the profession regarding the various egregious audit failures.

People are simply making the point that, even when certain auditors aren’t making life difficult for themselves with slapdash or worse work, all auditors are really on a hiding to nothing due to the open-ended nature of users’ expectations of what an audit can achieve.

This is a forum where accounting professionals moan about Joe Public. Are you saying that we can’t moan about Joe Public’s mistaken assumptions about audit?

Thanks (1)
By b.clarke
02nd Sep 2021 12:35

I don't think that the threat of withdrawing a practicing certificate is much of a threat. The partner concerned will just get a well-paid job with the client and continue to laugh all the way to the bank.

No, there has has to be a realistic chance of hard jail time for those who do wrong. Nothing less will do. Conspiracy to defraud sounds like a viable charge. A conspiracy needs two or more players - the client and the partner will do. And the shareholders will, more than likely, have been defrauded.

Forty years as a practicing accountant (who got out of audit ASAP) have taught me this.

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By Alf
03rd Sep 2021 09:53

Audits should be carried out by the National Audit Office or some similar government body, which is not just using it as a loss leader for other work.

Thanks (1)
Replying to Alf:
paddle steamer
08th Sep 2021 10:53

Fine, but who is going to train them to be auditors of quoted companies, are they taking all audit training in house, are they going to continue to rely on the Institutes and send their trainee employees to training courses/exams run by the Institutes (will the Institutes want to bother carrying on with audit courses longer term)?

I suspect what would evolve is auditing becomes a distinct profession, with a distinct qualification issued via training with the NAO, pay is structured into a civil service type pay structure and the big money, that all the really bright graduates aspire to earn, is elsewhere leading to them over time not becoming auditors.

You then have the FDs in industry earning a fortune playing against the Auditors in the NAO earning a relative pittance, whilst extra pay does not guarantee intellectual quality it generally tips the odds.

For all the problems arising from the incestuous relationship between auditors and clients (I am the FD of a former audit client) it is in my view helpful if auditors have, at least initially, a wider, broader training, throwing all audit through the NAO will imho likely curtail that breadth over time.

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Replying to DJKL:
By Alf
09th Sep 2021 11:24

I hear your points. I haven't spent the time to think through all of the details but I'm sure there are solutions.

For me the over-riding point is that I don't see any other way to avoid the inherent conflict of interest that currently exists.

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Replying to Alf:
paddle steamer
13th Sep 2021 17:51

National Lottery or the draw for the Scottish Cup (with Rod Stewart, if possible)

In basket A we havePremier League Deloittes drawn against HBOS
In basket B we have Premier League PWC drawn against Shell
In basket C we have Championship Grant Thornton drawn against Glaxo

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