Howarth Morros

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Have auditors caused an industry crisis?

Big British businesses are failing at an increasingly alarming rate.

Beginning with the collapse of BHS, through to the sale of House of Fraser and accounting irregularities for Patisserie Valerie, to name a just few.

What do these firms all have in common?
Their issues have stemmed from auditors.

Three reasons why auditing is an industry in crisis.

1. Prioritising Profits

Many blame the “big four” auditing firms: PwC, KMPG, Deloitte and EY, for creating a culture where the priority is pounds before professional practice.

For these businesses, non-auditing consultancy work can bring in far more income than auditing.

For example, in 2017, the big four earned a total of £2.1bn from auditing, but an additional £8.4bn from non-auditing work.

This causes a massive conflict of interest when poor consulting advice works in the favour of auditing firms.

This happens when the subject organisation fails and the company that provided the poor advice are allowed to handle the liquidation process – such as in the case of BHS.

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2. Poor Quality, Unethical Audits .

The UK accounting watchdog, Financial Reporting Council (FRC), reported on a “deterioration in the quality of the audits to an unacceptable level” on KMPG’s auditing of Carillion’s accounts. No financial sanction was imposed on KMPG, but 25% more of its audits are to be inspected.

Consequently, PwC were brought in to handle the liquidation process of Carillion. The liquidation is expected to make an overall loss, but PwC are netting £50m from the process.

This has raised questions over the ethics of auditing companies, especially when taxpayers are left to foot the bill.

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PwC also faced scrutiny over their handling of their auditing for BHS.

They received a record breaking fine from the Financial Reporting Council (FRC) at £6.5m – negotiated down from £10m.

While a record-breaking amount for the FRC, for a company like PwC this is just a drop in the ocean.

This has led to many calls for a break-up of the big four, including the former heard of the HRC, Stephen Hadderill.

However, it’s not just the big four falling foul. Grant Thornton is also under investigation as its role of auditor of both Patisserie Valerie’s and Sports Direct International’s accounts.

3. Inadequate regulation .

The lacklustre response from the FRC has also been blamed for the current state of the auditing industry.

The head of the FRC quit after criticism received in relation to the collapse of Carillion, while the FRC itself is currently subject to multiple inquiries into their effectiveness and independence.

It has been suggested that a shake-up at the FRC will place additional pressure on the industry and the dominance of the big four.

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What can auditors do differently?

1. Ensure that there is no conflict of interest.
It has been suggested that the big four should be banned from earning lucrative consulting fees at businesses they audit.

KPMG have already begun trying to address this, as they are planning to stop providing non-audit services to FTSE 350 organisations of whom they audit the accounts.

2. Turn down bad jobs.

Be savvy and recognise when business is not going to be beneficial.

EY, KPMG and PricewaterhouseCoopers (PWC) all refused to get involved with auditing Sports Direct International because of potential conflicts of interest and concerns over reputation.

3. Consider Ethics
Making a large profit from a liquidation netting a loss, when the tax payer is footing the bill will not sit well.

Consider how decisions will impact upon, and appear to stakeholders. Not only will this avoid investigation by the FRC, it is the right thing to do!

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