Can accountants be trusted? A response to Ian Fraser

Posted by Christie Malry on March 28, 2014 at 12:41 pm

Yesterday, Economia magazine published the latest in its rather controversial series of debates. Entitled "Can accountants be trusted?" it put former ICAEW president, Mark Spofforth up against journalist and author, Ian Fraser.

I didn't find myself convinced by Fraser's case and, thanks largely to Twitter's 140 character limit and my own mercurial mood, we didn't get that close to resolving our differences on Twitter. So that's the purpose of this post: to set out what I see in flaws in Fraser's reasoning that lead him to incorrect conclusions about the accountancy profession.

It's worth pointing out that I'm not in the employ of the Big 4. As has been the case with this blog ever since I first started blogging in 2010, I care only about facts and what can logically be deduced from those facts. So my issue with Fraser's piece is that I see it as drawing inferences that cannot be inferred, not that I am personally unhappy with where he ends up. Nor should you read anything into my clashes with Fraser before. This is solely to do with this piece.

Because annotating each comment in HTML might become cumbersome, I've uploaded his entire text to Google Drive and added comments there. Please feel free to add your own comments to my comments (I think I've set the permissions right for you to be able to do this). Or you can simply comment below too.

In most cases, my issue is that Fraser makes claims which he doesn't support. If these claims turn out not to be true then everything that is deduced from them is in turn also not true. I also find that he has drawn examples from a selection of accountancy firms' behaviour and then claimed that these behaviours are representative of other accountancy firms and other work done by those firms, without demonstrating that it's appropriate to do that.

Whether accountants can be trusted is an important debate, and it needs rather more air than Economia's rather unfortunate to-and-fro, restricted to a single page of their magazine, can provide. So I hope we can get rather further than Economia managed.

The ICAEW is sceptical about country by country reporting

Posted by Christie Malry on October 28, 2013 at 8:15 pm

The ICAEW is deeply sceptical about country by country reporting and doesn't think the EU should introduce it until there has been a thorough impact assessment, according to Economia magazine.

This is great news. Because the problem with country by country reporting is that it simply cannot deliver the benefits its proponents claim of it. So it's a very good idea to assess the benefits it actually will bring, rather than what its supporters claim it will bring, and its related costs before introducing it.

I'm a loser, baby pt 2

Posted by Christie Malry on December 20, 2012 at 9:02 pm

The Economia 50 has been published. And I ain't on it.

I have to say, I don't really understand why. I was nominated (thanks, Truen!). And my PeerIndex score (of 51 at the time of writing) ought to get me in the top 50. So I guess I really am a total loser :(

The impact of auditor rotation on independence

Posted by Christie Malry on April 26, 2012 at 8:42 pm

Via @truenfairview, I'm led to an article in Economia on the impact of auditor rotation on auditor independence:

Long-lasting relationships between auditors and their clients do not lead to a loss of independence on the part of the auditor, with independent research suggesting the opposite

Independent researchers at the Nyenrode Business Universiteit in the Netherlands have discovered that auditors are more likely to ensure that corrections are made to financial statements if they had had a relationship with the client for at least five years.

However, their research also revealed that the impact of the audit decreases where the firm provides more than 30% of non-audit services to the audit client – although the “important” audit differences were always corrected.

In a survey of information drawn from the audit files of 147 Dutch listed companies, pension funds and very large privately held companies, the researchers found that in 23% of the organisations, the audit led to corrections of amounts involved in the balance sheet and profit and loss accounts before the audit opinion was issued.

The audit also impacted positively on the notes to the financial statements and the directors’ report where corrections were made in 77% of cases.

Professor Leen Paape said that 72% of the important audit differences were corrected in the annual report, while the remaining 28%, concerning 14 organisations, were below the pre-determined error margins.

According to his co-researcher, Joost van Buuren, more audit differences were being corrected where the client relationship was longer than 10 years than when it was shorter.

However, the positive effect on the processing of auditing differences was already there if the auditor had been auditing for a client for longer than five years.

Instinctively, I want to agree with their conclusion. It seems that the risk of being over-familiar with an audit client is just one factor that influences overall audit quality. But I find the researchers' methodology to be very suspect. It's not clear to me that "adjustments initiated by auditors" is necessarily a good proxy for audit quality. For example, it might be that diligent managers are more likely to appoint new auditors. That could mean there are fewer errors simply because the accounts are right in the first place.

Also, the concept of "auditor rotation" is often misunderstood. The term 'auditor rotation' is used to refer to the audit firm changing. But the IFAC Code of Ethics for Professional Accountants states that over-familiarity of key personnel with a client can be a problem, and that the solution will ultimately be for the audit staff affected to rotate off that client. So members of staff already rotate. Similarly, key members of client management may also change on a fairly frequent basis. The idea that, because the audit firm has been associated with the audit client for many decades, there is necessarily a problem of independence is far from obvious when the audit staff and client management are changing frequently. Again, it's unclear from the Economia article whether the researchers' methodology takes account of audit staff and management newness as a variable in their regression analysis. For example, it could be that a change in client management is associated with errors by the new managers, due to their unfamiliarity with their new employer's business and systems.  

This is a dangerous area for the big audit firms. Barnier seems hell-bent on demanding fixed rotation periods of six years (or nine years where a joint audit is undertaken). It's still uncertain whether the UK's proposed ten year audit tendering on a "comply or explain" basis for FTSE 350 companiess will be seen as a sensible compromise. The firms need good, solid evidence that they can rely on to support their case that rotation will be bad for audit quality. I'm just not sure that this piece of research will help them much.

The alternative Finance 100

Posted by Christie Malry on March 6, 2012 at 10:09 pm

I wrote recently about the ICAEW/Economia Finance 100. And I highlighted some of the concerns that people have raised about the list.

I started putting together a list of accountants on Klout. But in many ways, the list Mark Lee has already put together is better. So why not check out Mark's list if you want to see how UK accountants stack up, Klout-style.

(and feel free to give me some Klout if you're so inclined)

Having fun with Economia's Finance 100

Posted by Christie Malry on March 5, 2012 at 10:38 pm

With some fanfare, Economia launched its Finance 100 last week to coincide with its March issue. This is meant to be a list of those who have the most influence in the financial world, and are picked up and followed by key Twitter users.

Do you sense a little scepticism in my tone? That's because when the list was launched, I wasn't on it. So, after checking the list, and my PeerIndex score, and the list again, I went all wicked fairy on Economia via Twitter to demand an explanation. Only, er, to find that now I was on the list after all, at number 74. At the time of writing, this puts me higher than PwC UK, Grant Thornton UK and the CBI. Ha!

The list itself isn't without its critics, with a quite amusing discussion on Economia's webpage about whether PeerIndex is really the best measure for assessing impact, or whether Klout might be better.

So who is still missing from the list? I'd nominate Frances Coppola, whose PeerIndex score would certainly propel her into the top part of the list. How about Kevin Reed, Editor of Accountancy Age? Where's James Hellyer? And why does PeerIndex give such paltry scores to Ken Frost and Truen Fairview, two of the most erudite tweeps on accounting matters? There are certainly some anomalies in the way they've defined their universe for the purposes of compiling the list and the way that PeerIndex measures influence. But it's a brave attempt to put together a list of the most influential finance accounts and I look forward to future updates, especially those that propel me higher up the list!

The meaning of Economia

Posted by Christie Malry on December 14, 2011 at 9:25 pm

There's a very amusing interchange in the ICAEW LinkedIn group (no URL as it's a private group):

There's more on the history of Economia over at the ICAEW's website

Goodbye Accountancy magazine, hello Economia!

Posted by Christie Malry on December 6, 2011 at 9:57 pm

So, the new ICAEW magazine is to be called Economia.

The name is taken from Economia, the lady who acts as the physical manifestation of the ICAEW. And look at the elegant way they've stuck the old bird herself into the logo. The logo is all funkily lower-case too.

Of course, 'economia' is also the Spanish word for 'economy' so should play well internationally too. Although it will also make it much more difficult to find a sensible URL for the new magazine.

The first issue of Economia will be sent to all members in early February.

(OK, so I was beaten to the story by over a week by my old buddy Graham Hambly)