Andrew Peaple at the Wall Street Journal analyses regular auditor changes and improvement of audit quality.
The financial crisis exposed major weaknesses in the quality of accounting standards. But it has also raised concerns about the way those standards are being applied. Auditors are appointed by the board and report to shareholders. But the risk with long-standing auditor relationships is that the accountants may become too close to company executives, prioritising their concerns over their duty to investors.
Banks are a particular area of concern. The UK's Financial Services Authority complained this year that Barclays has consistently taken an aggressive approach to interpreting rules and regulations, echoing consistent complaints from shareholders in recent years over some of its practices. Barclays has had the same auditor, PricewaterhouseCoopers or one of its antecedents, since the 19th century. A fresh pair of auditor eyes might have helped curb any excesses: Auditors can be just as reluctant to challenge their own past judgments as they are willing to go against the wishes of the companies that pay their fees.
Sure, shareholders already have a statutory vote each year on the reappointment of the auditors. But such votes rarely lead to change. Shareholders often have other priorities; and because companies disclose little about their dealings with auditors, they often have little firm evidence on which to base a negative vote. In practice, shareholders have left boards to appoint auditors, which in turn have relied on management to choose. The result: On average, FTSE 100 companies have had the same auditor for 48 years, according to the Universities Superannuation Scheme, the UK's second-largest pension fund.
Regular auditor changes could help restore confidence in the independence and credibility of audited accounts. Audit quality should improve, in part because audit firms would know their work would be subject to peer review by their successors. Auditors complain that enforced rotation would be costly and disruptive, but a change every 15 years hardly looks unmanageable.
Press release
© Wall Street Journal
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article