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Is poor auditing a crime?

29th Apr 2019
Partner An unnamed firm
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Police Line

Will any of the audit market measures being proposed by the great and the good help to provide backbone to small auditors? Not according to our anonymous blogger.

Following a series of media attacks and critical reports about the quality of auditing in the United Kingdom, including those by the Financial Reporting Council and parliament’s Business, Energy and Industrial Strategy committee, the Competitions and Markets Authority has issued a series of proposals that it believes will remedy the problem.

Every reader will be aware that the last year has not been good for our industry, as a series of auditing failures have contributed to stakeholders, including the government, losing vast amounts of money when companies such as Patisserie Valerie and Carillion went under.

The two primary solutions that have been proposed are the replacement of the FRC by a new body and a stronger division between auditors and consultants. The latter point has been watered down by the CMA which, rather than demanding that separate firms or companies be set up, is willing to allow one corporate unit to carry out both kinds of work for the same client, provided that there is separate management and control.

A third proposal, which looks to me like window-dressing, requires that Big Four auditors allow smaller firms to join them on major audits. As I have previously suggested, the only benefit that this appears to offer is a chance for the subsidiary auditors to make fees.

I want to address two issues in this article. First, each of the bodies trying to find a solution appears to believe that many of the issues derive from a lack of audit independence.

To my eyes, the implication is that auditors consciously sign off accounts that do not show a true and fair view of major companies’ performance. To compound the problem, some of those companies inevitably go under, leaving shareholders, suppliers and customers/clients in the lurch.

If that is the case, then surely those auditors are, at the very least, guilty of gross incompetence and if it can be proved that they have knowingly signed off incorrect accounts, I wonder whether this might constitute a criminal offence? It seems very close to aiding and abetting fraud, if not actually committing it.

I shall be very interested to hear from any reader who has greater knowledge about this issue but in the absence of expert guidance, some guilty auditors might be quaking in their boots at the prospect of indictment and an opportunity to consider their actions in tranquillity at Ford Open Prison or somewhere even less salubrious.

Secondly, I have always imagined that the big boys (and girls) are generally able to withstand pressure from clients far better than the meek and mild auditors working in much smaller practices.

I am well aware that many colleagues and peers have been faced with difficult decisions when clients refuse to accept adverse decisions relating to profitability, either where a company wishes to present a rosier picture than the auditors feel is justified or is trying to reduce tax liabilities.

Even more seriously, sometimes suggestions that the company is no longer a going concern can be met with a response that is dangerously close to blackmail – sign off the accounts we will take away our business.

As far as I can see, none of the measures being proposed by the great and the good will help to provide backbone to small auditors. I accept that the scale is less significant but the consequences can still be devastating for those caught out when companies become insolvent.

Replies (4)

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By johngroganjga
29th Apr 2019 13:04

I am no lawyer, but being incompetent or negligent is not a a crime.

Knowingly signing a clean audit report on accounts that are known by the auditor to be incorrect very possibly is, perhaps depending on what consequences follow the signing. But that is so rare an event as not to be worth spending any time thinking about.

Thanks (1)
By Mike Bath
29th Apr 2019 15:47

I don't believe that many auditors sign off accounts that they know to be materially incorrect - some do, but I've found them to be in a small minority. Far more often, auditors sign off accounts in good faith where those accounts include judgments about the future which turn out to be different from what actually happens. Hindsight is a wonderful thing: it's far too easy to work backwards from a corporate collapse and point out the judgments which didn't come to pass, but much harder to assess the original judgment on the basis only of what was known at that time.

It's also worth considering that very few companies collapse due to poor auditing rather than poor management or governance - from the tone of some of the coverage the lay person could be forgiven for believing that companies fail because of weak auditing. Rather than looking to criminalise auditors, should we be asking why more directors aren't prosecuted under Section 501?

Thanks (3)
Chris M
By mr. mischief
29th Apr 2019 19:29

My solution to this is really quite simple. ANY corporate bankruptcy within 6 months of a clean audit report is prima facie a dodgy audit, and the default assumption is prison and hefty fining in the case of large companies.

Alternatively, just accept all auditors are chocolate fireguards and scrap auditing altogether.

At the moment it's not a level playing field. Sceptics like me don't invest in companies where I can see there could well be some dodgy accounting policies and auditing going on.

Whilst naive investors get scalded time after time.

Bulls make money. Bears make money. Sheep get eaten.

Thanks (3)
By coolmanwithbeard
08th May 2019 07:14

Having been on the end of poor auditing in the public sector I can say that it can be about sending in inexperienced and untrained staff. As an educational establishment we had a "big" firm and there was no consistency of staff (so no one looking at year on year trends) and often they did not have the knowledge to spot things. We sacked them when someone they sent to check the journals asked our FD "what is an accrual?" not what is that accrual. He didn't understand them and our FD had to explain it to him.

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