​External Auditors Under Pressure in UK​

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​For several months, the House of Lords has been holding hearings into the external audit profession in the UK. They have reviewed the role of the auditors in the financial crisis, whether their dominance of the external audit market (the Big 4 audit 99 or the FTSE 100) affects audit quality, the quality of communications with regulators, and the risk of one of the Big 4 failing.

They have just released their report. The best summary I have seen is by the Telegraph (a national UK newspaper).

One of the key observations, apart from recommending the UK regulators investigate the external audit market, is that while the audit firms may have complied with their legal obligations, they failed to meet their ‘wider’ obligations. By that, they refer to the fact that the auditors provided an opinion based on whether the financial statements complied with IFRS rules, but failed to assess whether those financial statements provide a true and fair view of the results of operations and the financial condition of the company.

I recommend checking out these blogs on the topic:

  • Insider, from the editor of Accountancy Age.
  • Forbes, by Francine McKenna.

The response by the industry is very interesting. The Accountant has good coverage.

My thoughts:

  1. It is important that companies comply with accounting rules. But, it is even more important that the financial statements provide reliable and useful insights into the financial condition and the results of operations. The current external auditor opinion does the former, not the latter.
  2. While it is interesting that consideration was given to having the external auditor assess and report on risk management, I am not in favor of that. I would prefer that management and the board be required to assess and report on the adequacy of their risk management process and have the external auditors focus on the financial statements. They should look at risks only to the extent that they need to perform their financial statement audit. The internal audit function can and should assess and report on the adequacy of the enterprise-wide risk management program.
  3. Regulators, investors, and exchanges around the world should give strong consideration to the House of Lords report. What changes, if any, are required in their market?

What do you think?



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