The fallout from Carillion
There has been quite a bit of comment and speculation over the role of the Auditors in the collapse of Carillion and indeed another recent corporate failures. What follows below are my views.
The “Big Four”, and other Accountancy firms that aspire to be as large as the Big Four, are playing a completely different game from me. They are basically multi-national business advice corporations. Audit fee income is a relatively small part of their turnover. It is important to them because the statutory audit gives them an opportunity to sell to their audit clients management consultancy services, data protection services, computer security services, and the like.
My wife used to work for various major city firms and used to field questions from their Auditors as a matter of routine. In her judgement they usually asked the wrong questions, and the audit staff were as a general rule extremely young and inexperienced. They tended to see audit work as an unwelcome but necessary rite of passage before qualifying and going on to do something more interesting.
In Law, the Auditors are answerable to the members, that is to say the shareholders, of the company they are auditing, and all audit reports are addressed to the members. However, in practice the shareholders do not normally have any direct influence over the conduct of the audit, or the relationship between the Auditors and their clients, or the decision on how much to pay them for their services.
The perception of major audit firms is that they are “too large to fail”. This is the comment of Oliver Gill in City AM on 21st May 2018:-
“Breaking up the accounting oligopoly would shift the balance of the power further in favour of Company Directors. Auditing minnows would be more (not less) inclined to please executive masters as their financial fate would be determined by holding on to audit mandates which represents a large proportion of annual revenues.”
My answer to this point is that if the Auditors were paid, not by their company clients, but by a committee of shareholders from whom they would receive instructions as to the scope and direction of their work, it should solve that problem. If the client Company is carrying out significant Government contracts, then a Government representative should also be on the panel of shareholders to whom the Auditors would report.
To the question of where the money could be found to pay the Auditors, in practice most shareholders are pension funds which have fairly deep pockets and should be in a position to pay the Audit fee. Alternatively, it should be possible to organise a levy on all public Limited Companies and major financial institutions operating in the UK to fund audit fees. It should not cost the business community as a whole significantly more than what they currently pay to be audited.
I do not see why any organisation which employs sufficient personnel with Audit experience should not be able to tender for Audit of any listed Company. I can think of no compelling reason why Banks or Solicitors could not, at least in theory, carry out Audits of accounts of Companies as long as these Companies are not their clients for the purpose of any other services.
I also think it is not correct that any Audit Firm should be able to use the Audit as a means of cross selling other professional services. There should be a complete separation between the audit function and the business advice function such that one organisation cannot provide both. This should have the force of law.
And finally, I believe that all directors of listed companies should have Professional Indemnity Insurance. They are the people who have day to day responsibility for their Companies, and it only seems right that they should have to bear their share of the responsibility for business failure.
Many years ago, there was a report by what used to be called The Department of Trade on the acquisition of Pergamon Press by the Leasco Data Systems Corporation. In those days, Pergamon Press was controlled by Robert Maxwell. The Department of Trade Inspectors reported that in their opinion, Robert Maxwell was not a suitable person to run a public company.
Had all directors of public companies been required to have Professional Indemnity Insurance in those days, then it seems to me that Mr Maxwell would not have been allowed anywhere near Mirror Group Newspapers or its pension fund. Nobody would have insured him. The Daily Mirror pensioners and their dependents would be much richer now if such had been the case.
This is important for all of us because it affects the reputation of the UK and of London as a business centre.
– By Stephen Handley, FCCA