This is the season of goodwill and I was expecting a little bit of comfort and joy from those issuing two separate reports on the auditing sector in the United Kingdom.
Instead, those reports are collectively damning and suggest that a major overhaul is required. I have to say that while the timing may be unfortunate the conclusions are long overdue.
First, the Competition and Markets Authority has published some interim proposals, which at least stop short of suggesting that the Big Four should be broken up.
Instead, as widely predicted, there is likely to be a statutory division between the audit and advisory arms of the big firms.
There is also a much more controversial idea, stemming from the French model. This suggests that FTSE 350 companies should have not one but two auditors (which should get three cheers from the profession in that is likely to lead to much higher combined fees).
The real joker in this pack is the collective identity of the second auditor, which will be a firm outside the Big Four. Given that these firms have practically no experience of auditing FTSE 100 companies and limited exposure on the next tier down, it is hard to see what this will achieve beyond window dressing.
There is also a further proposal that will benefit the mid-tier in the form of a possible market cap limitation. This will somehow guarantee that certain major audits cannot be carried out by the Big Four. The same concerns inevitably apply.
Kingman Report into Financial Reporting Council
Almost simultaneously, Sir John Kingman of Legal & General has confirmed what has been blindingly obvious for years. The Financial Reporting Council is not fit for purpose.
Therefore, he believes that it should be ditched and replaced by a new audit reporting and governance authority. This would largely be peopled by those who have not worked for the existing organisation and might also have limitations on the number of recruits it could take from those that are going to be under scrutiny.
This will be a real blow to those large practices that have regarded the FRC as a great friend and a safe haven when they are under attack. At the same time, you would have to hope that it might lead to much-needed improved auditing standards.
Yet more reviews
In case anyone thinks that this isn’t enough, another kicking for the beleaguered profession is being proposed by Parliament’s Business Energy and Industrial Strategy Select Committee.
It has asked Donald Brydon currently chair of the London Stock Exchange to examine the scope of audit more widely.
The Labour Party also wishes to join in the fun and, for its part, has asked long-term critic of much that is wrong with the profession Prem Sikka to carry out his own investigation.
This is even more radical, calling for many things in the other reports including dividing audit from other services and joint audits but, as icing on the cake, Prof Sikka would also like to set up a nationalised audit body to look into public interest entities such as banks.
While this might be a nice Christmas present for the mid-tier of the profession, it could easily be argued that the Big Four only have themselves to blame.
They have been failing stakeholders on a regular basis over the last decade and more (as have some of those lower down the pecking order), while self-regulation has proved to be almost as toothless in the accountancy business as the media.
My immediate fear is that we will just be subject to years of reviews, with those in power filibustering and protecting their own position by doing their damnedest to ensure that there is no major change to the status quo.
Ultimately, each and every one of these proposals is likely to lead to additional costs that will have to be borne either by the public purse or customers/shareholders.
However, if the consequence is that audits become more rigorous and there are fewer Enrons, Carillions and Patisserie Valeries, perhaps it will all have been worth it.
I’m not holding my breath.
About The Imprudent Accountant
Someone who should know better, but can't resist the occasional rant about the more exasperating aspects of the accountancy profession.