Friday, 14 May 1999

Auditors: An even better profession?

News article from Governance.

Speaking at the Institute of Chartered Accountants of Scotland Aileen Beattie Memorial lecture, John Griffith-Jones, co-Chairman of KPMG Europe, asked: ‘What does the relationship between the auditor and society need to become if the accounting profession is to create for itself an even better and therefore sustainable future?’

He suggests that rather than wait for the question ‘Do we still need audits in their current form?’ audit firms should try to improve further their contribution from the current position of strength. Standards convergence, the changing shape of the economic world and the raised expectation by society of what an audit should be able to achieve are some of the challenges ahead ‘We should be planning now for the next ten years, not congratulating ourselves on how far we have come in the last ten,’ he said.
Griffith-Jones paid tribute to David Tweedie and the work of the International Accounting Standards Board on converging standards and said that good progress is being made with International Auditing Standards which ‘whilst less glamorous is every bit as important’.

He anticipates even greater challenges in achieving consistency in the interpretation of these standards and asks what is going to happen when something goes wrong with an audit or set of accounts prepared to ‘global’ standards?

China is now home to seven of the largest 20 listed companies in the world and China should naturally be given a powerful seat at the table. Given the credit crunch served up by the proponents of the Anglo-Saxon way, it is no longer a foregone conclusion as to who will have the greater moral authority when it comes to future changes. The danger, says Griffith-Jones, is that the technocrats will be tempted to and try to drive out deviation by introducing more and more prescriptive rules rather than having the courage to rely on a principles-based approach.

Speaking on the subject of the modern view of the audit, Griffith-Jones says it is time to call for a redefinition of priorities and a simple re-statement of purpose. The audit in his view is not only the staple produce of the profession but also what the profession’s reputation for integrity, efficiency and competence rests most solidly upon. Ideally an audit should spur the company to do an honest, thorough and responsible job in the first place and reduce the chances that deliberate or accidental errors, get into the final accounts because they have to pass through the audit sieve.

In his view, the current process reduces but does not eliminate errors. With existing technology perfection cannot be reached simply by the introduction of more rules or more work. There is a subjective judgement-based element to the process, whose effectiveness is highly dependent upon the quality of the people doing it.

And Griffith-Jones wants to close the resultant expectation gap between the profession and the rest of the world.

As an example of the ever lengthening wording of the audit opinion John Griffith-Jones compared the five line audit opinion of ICI in 1968 to the ‘too lengthy’ opinion for the same company last year, and says that whilst the sincere intention behind each added word and sentence may have been to add a new level of clarity to the world at large about what an audit was, and was not, we all know that this has not been the case. This led to his suggestion of the introduction of a ‘kitemark’ for audit reports, to give an assurance of safety in the same way we would expect when purchasing a child’s toy. There is a great difference between the standards of ‘about right’ compared to the major audit failures of recent years where the accounts turn out with hindsight to be ‘spectacularly wrong’ and no amount of words in the auditors opinion will change that fact. Are the lengthy opinions not more about avoiding litigation than providing society with a more reliable product?

Griffith-Jones asserts that he is not seeking any reduction in the vigour with which an audit is carried out but believes a kitemark which the profession and society should work towards could be summarised in the vernacular as: ‘These accounts are about right unless management have deliberately conspired to falsify them’. Society for its part would need to accept the standard of ‘about right’ as value for money, whilst individual auditors and firms, for their part, would need to sign up to an increased level of responsibility for all material error elimination, apart from fraud.

No comments: