The way we audit the UK’s biggest businesses must change. And while most commentators argue for changes that will lock down the market, we want a solution that reinforces auditors’ independence from the management of our most influential firms.
Trust and confidence in audit have been damaged by the failures of companies like Carillion and BHS. In addition, the accounting decisions of the management of large bodies have not always reflected the needs of their investors, employees, pensioners, customers or suppliers. So we recommend a solution that has proved effective elsewhere.
In line with our purpose of helping shape a vibrant economy, we want people to be confident that their job, pension or investment as a supplier or owner will not be lost because a company is less financially stable than it reported.
Audits for the most significant businesses in the UK fall under European “public interest entity” audit rules. Businesses choose the auditor that checks their financial statements are true and fair. It’s a system that should allow us to trust their accounts. But audit relies on independence, which is particularly important for the Public Interest Entity group of companies.
Ensuring true independence of audit procurement
English local authorities appoint auditors a different way. It makes procurement cheaper, delivers quality audits and protects the integrity and independence of their financial team and their auditor.
Local authorities created Public Sector Auditor Appointments (PSAA) to appoint auditors to a range of local bodies on their behalf. It awards contracts to create portfolios of clients that reflect auditors’ quality and capacity to deliver. It tenders for new auditors every five years. We need such independent procurement of audit for Public Interest Entities to help to restore confidence in the UK audit market.
We recommend creating an independent audit appointments body
An independent body to appoint auditors to these larger firms could be based on existing structures and mechanisms. And it could be funded by a levy on Public Interest Entities. This would support streamlining of the tendering process within the public interest entities. The independent appointer could be a new body or one grown from other organisations in the public and private sectors. The reforms could be built into any changes recommended as part of the Kingman review or competition review.
The big difference with the PSAA model is that local authorities brought PSAA into existence. We want government, large UK firms, investors and other stakeholders together to develop an independent appointment body for Public Interest Entity audit. In the face of increased scrutiny and political and economic change, supporting independent appointment is a significant step to restore confidence in the audit process among their owners, potential investors and the public at large.
And in addition
The creation of an Independent Audit Appointments Body would be complemented by other reforms:
Stopping auditors selling extra advisory services to the same public interest entity altogether.
Defining public interest entity also to include the UK’s largest, most well-known privately-owned firms, where their financial sustainability has wider societal impact.
Changing a company’s auditor more often.
Kick-starting joint audits where two audit firms use complementary expertise to complete an audit, which could increase market diversity and confidence.
Ensuring audits do what the wider stakeholders expect such as considering the viability of the organisations being audited.
To join the campaign or for more information please contact Jon Roberts.