Last month marked 10 years since the conviction and subsequent collapse of Arthur Andersen. This was one of the most high-profile cases to have tainted the audit profession and has been discussed and dissected exhaustively ever since. This anniversary got me thinking about whether as an industry we’ve seen any substantial change for the better.
Unfortunately, the collapse of Andersen was not the only high-profile scandal to rock our industry during the last decade. As the financial crisis deepened, several prominent organisations, including Lehman Brothers, HBOS and, more recently, Olympus, have experienced public difficulties, despite receiving apparently clean bills of health. Few auditing firms have escaped scrutiny.
The Andersen case was a major landmark because it demonstrated the collapse of one of the then ‘big five’ and the fallibility of seemingly untouchable networks. Since then, new initiatives have been introduced and new bodies created - such as the US Public Company Accounting Oversight Board - but in reality reform and progress has been slow.
Commentators are still suggesting that it is inconceivable that one of the ‘big four’ would be allowed to go under because of the anxiety this would cause investors. This is a valid concern, but it does not do anything to strengthen the moral position of our industry. Rather than the role of any given firm, it is more important that we as a profession implement changes that will have a positive and lasting effect on the audits we undertake. We need to go beyond the standards in place to deliver a true picture of what lies behind the numbers: I’d call this intelligent auditing.
There are simple measures that can be taken to make this a reality. Firstly, we need to be more sceptical of the companies we audit. We also need to take time to develop a true understanding of the business being audited to ensure an informed and open account – like one of our BDO partners, who has been known to go down his client’s mine in order to truly understand the business he and his natural resources experts are about to audit. I reject any criticism that these sort of actions are getting ‘too close’ to your client – I see it as getting under the skin of the business so that you can delve that bit deeper and provide a tailored service based on real understanding and insight.
As a profession, we need to take steps to prevent any one network from gaining undue dominance in our market. This is not about clamouring for business. It’s about taking appropriate steps to prevent similar scandals and restoring faith in our industry and protecting our collective reputation.
Later this year, we will have a clearer indication of where the EU Commission's proposals for audit reform in Europe will end up – although of course the final text won't be definitively known until well into next year. As has been well documented, I believe that this is a crucial opportunity to make important changes to the structure of the European audit sector and I hope that Mr Barnier and his team will stand firm in their demands. We’ve been pleased also to have the opportunity to contribute and respond in detail to the Competition Commission in the UK and I am hopeful that the outcome of this review will support reform of the industry in the UK and consequently in Europe.
Decisive actions need to be taken if we are to avoid jeopardising the painful lessons we have all learnt over the past ten years.