Posted by Christie Malry on March 21, 2010 at 10:48 pm
CM: This was, in my view, a very shoddy and badly put together episode. I will be responding to the issues raised in order to give the balance this episode failed to provide. In the meantime, I have summarised the episode verbatim below.
We have had in the last decade or so some spectacular and notorious frauds. In some cases, there were complex and exotic accounting devices used to mask the scale of the fraud. Only this last week, we have seen reference to Lehmans and their "accounting gimmicks" and questions have been raised of their auditors, Ernst & Young, who may have failed to question their disclosures.
Jenkins interviewed Steve Priddy, Technical Director at the ACCA [CM: I wonder where Helen Brand was, eh]. Were the auditors to blame? Unsurprisingly, Priddy didn't want to comment on the detail. There might be some culpability, but he wouldn't know one way or the other. Jenkins had another go - company auditors are paid millions to do their job, but what did they do in this case? Priddy explained about the audit process. Auditors do some tests to allow them to form a view on truth and fairness, but we must remember that banks are complicated. Even directors don't always understand all transactions, which makes it hard for auditors to stay one step ahead. Meantime, the Lehmans investigations will surely continue.
This is not the first time auditors have got the blame. Enron is the recent case we all remember best. Anne Loft (Lund University, Sweden) said that their auditors, Arthur Andersen, had gotten too close to the company. It was advising companies like Enron how to set up connected companies in which they could hide liabilities while also doing the audit. There were also many former Andersen employees working at Enron.
Prem Sikka is a long-standing critic of the profession. He sees auditors as a weak link in corporate governance. A major flaw is that these big firms both do audits and also advise companies on how to bypass rules and regs and how to flatter their financial statements. They could check these things but have incentives not to do it properly. It's like a game of russian roulette. In his opinion, the recent banking crisis "vindicates" his point of view. He gave a further example: even after Northern Rock had been nationalised, audit firms were still giving clean audit reports to banks. This ought to have been a wake-up call to them.
David Cooper (University of Alberta) suggested that the profession has a short-sighted view of the public interest. Auditors really do try to be independent. But auditors and accountants are brought up with a view that what's good for business is good for society.
After Enron, Andersen collapsed, leaving just the Big 4. Sikka provided some statistics to explain the size of the Big 4. Overall combined turnover is $90bn a year, which would make them a very significant country. They operate all over the world, selling lots of other services.
Cooper also bemoaned how little we know about how they operate. They portray themselves as uber-rational and efficient but they can't live up to this. They sell the model to clients but don't live it themselves. And they promote transparency/accountability but don't disclose much themselves - they don't themselves provide audited financial statements.
Sikka added that even where they do publish accounts (e.g. because they operate through a limited liability partnership) they're very unhelpful. Also, at a company's AGM you are given the chance to appoint the auditor, but are never given any information to help you decide. For example - have they been sued? Have their partners gone to jail? etc... The Big 4 sell the idea of league tables, but there aren't any for performance of accountancy firms.
By contrast, Anne Loft thought it was more or less moving in the right direction. The International Federation of Accountants, which represents most of the major bodies and which sets international auditing standards has a public interest oversight board to watch over it and maintain the public interest.
Prem Sikka thinks more radical action is needed. He advocates a properly designated independent regulator to deliver what the public expects - to open audit firms up to scrutiny. With there now being more liability concessions for firms, it makes it more difficult to sue them. He believes we will see more and more scandals.
Priddy disagrees. The global consensus is that it's not a good idea to have a central regulator; self-regulation is the perceived wisdom. Jenkins asked him if firms are transparent enough. Priddy replied that it's a road we're all on. Firms are evolving. In the UK there are now regular inspections from the national regulator and its inspections are placed in the public domain.
David Cooper said that the information that other users need are still a work in progress. What is the sort of information that corporations might be providing to the general public to help them to hold organisations to account? These are ethical issues. Whose side is the accountant on? We must remain optimistic that we can get beyond obscure information and see what's really there.