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FRC executive counsel defends role of audit

Auditors are an important piece in the jigsaw of investor protection, according to Gareth Rees QC, the Financial Reporting Council’s executive director of enforcement and executive counsel

In an interview this morning on the Today programme with Dominic O’Connell, he found himself defending the role of auditors in response to a question about whether auditors were fit for purpose.

The question followed last week’s announcements about the imposition of heavy fines by the FRC in the UK on PwC over its audit of RSM Tenon and by the Securities and Exchange Commission in the US on fellow Big Four firm KPMG over its audit of Miller Energy.

Rees advised O’Connell to be careful about misinterpreting what the audit actually involves after the business presenter asked how auditors could make out they were “experts in everything”.

As an example, O’Connell said, if a construction company says that a football stadium it is building is half finished and the profits are recognisable, how could the auditors possibly know whether it is true, however skeptical they are, since they are not experts in construction?

Rees pointed out that he had been a practising barrister for nearly 30 years before he had taken on the executive counsel role. “I learnt very quickly over the last five years that one has to be very careful to understand what an auditor is actually required to do.

“The reaction that we hear when there is a corporate failure or a corporate scandal is ‘Were the auditors asleep on the job?’.

“What I’ve learnt is that the auditor’s role is crucial, that almost every audit is conducted to a high standard. We at the FRC are obviously looking at those where it has gone wrong but the auditor cannot be expected to do perhaps as much as many members of the public think they can do.”

Rees also swiftly rejected O’Connell’s suggestion that the expectations around the audit and the audited accounts are “probably just too high and we shouldn’t set such great store by them”.

He said that there was a distinction to be made between professional investors in the marketplace who understand what an audit does and therefore see it as high value and those members of the public who don’t have the same level of understanding of financial statements.

“What we see from the documents and what we hear from our experts is that most of what we see, even where we are looking at cases where things have gone wrong and even where we have taken action, still those involved in audit perform a valuable part of the overall protection of investors.”

He also told O’Connell that the FRC had been building up its team of investigative lawyers and accountants in recent years and was now able to take on the bigger accountancy firms – with their significant financial resources and choice of large law firms at their beck and call – more effectively.

He admitted that it was expensive but added that if the FRC was going to be an effective regulator, it needed “sufficient expertise and experience to do the job”.


Originally published in Economia on 22 August 2017.