According to a poll by ICSA: The Governance Institute and recruitment specialist The Core Partnership, just 9 percent of company secretaries surveyed think that the audit process has improved in the past year.
Respondents felt that auditors have become lazier and are pushing clients to deliver more information and format it for them to push through an algorithm. This “laziness” may partly be due to the fact that Big Four firms consider external audit as a loss leader to access better paying non-audit work. Several company secretaries said that auditors need to raise their standards.
But company management has also come in for criticism. Respondents said that management’s drive to push for lower audit fees has simply resulted in audit firms cutting back on the work they will do, thereby affecting audit quality. Another issue is that management and auditors still have too friendly a relationship. Respondents believe that greater independence is needed so that audit can do its work properly and provide appropriate challenge, with some arguing that there is a conflicting interest in providing the audit opinion and seeking reappointment as the auditor.
Lastly, respondents said that the “large” expectation gap between what auditors are required to do and what the public think they do needs to be addressed.
The U.K.’s audit market has come under renewed scrutiny following the collapse of the country’s biggest infrastructure firm, Carillion, which went into liquidation in January 2018 with liabilities of nearly £7 billion and just £29 million in cash. Investors had dumped company shares in droves in the run-up to the collapse—indicating that the market knew more about the true state of the company’s finances than those charged with a legal duty to do so.
A scathing Parliamentary report released last May found that KPMG audited Carillion for 19 years, but not once during that time did the audit firm qualify its audit opinion or exercise professional scepticism with regard to the financial statements. It also found that Deloitte had acted as internal auditor, while EY gave advice on risk management; MPs slammed them—as well as a host of other professional advisory firms—for simply taking management’s money rather than solving the problems.
When questioned about the best way for the audit market to be reformed, 45 percent called for audit and advisory businesses to be split within the Big Four. Many respondents said increased regulation and monitoring were necessary for reform and that the Financial Reporting Council (FRC), the U.K.’s corporate governance watchdog, needs to monitor performance better and intervene earlier.
“Generally, companies feel that it is too early to tell if things have improved to any great extent,” says Peter Swabey, the ICSA’s policy and research director.
“What is clear from the results of our poll is that there is very little confidence that proposed changes to the audit regime will lead to improvements in the audit process. On a scale of one to ten, with ten being very confident and one not at all, the average response was a lowly four,” he adds.
In December, the U.K.’s competition regulator, the Competition and Markets Authority (CMA), proposed splitting audit firms so that they could no longer cross-sell consultancy services to clients, as well as beefing up regulatory oversight of auditors and opening up the market to smaller players. A consultation process is ongoing.