Audit needs to fight back
Columnist Jon Moulton argues that now is the time for the accounting profession to aggressively fight back. He says there is too much change being planned, too little resource to achieve it and too much damage to the UK as an attractive place to do business
Given that these reports add up to around a six-inch pile, with about 400 assorted recommendations (and a lot of loose ends), I’m confident that none of our readers will have read this lot – certainly not any more than will have read the monstrous annual accounts that our public companies produce at such cost. Needless to say, Brydon piles on more expensively produced verbiage. Nothing is ever taken away.
Interestingly, the report says that the good Sir Donald takes total responsibility for the report – “mine alone”. I hate to think what an advocate of good corporate governance would think of an opinion from just one worthy. Isn’t diversity supposed to be good?
Benefits please?
Of course, as is the norm, there is no effort at a proper cost/benefit analysis in Brydon’s report – and a lot of objectionable content, such as a recommendation to introduce ‘suspicion’ into the qualities of auditing. There is a definite feeling of disdain for the current quality of audit. Of course there are failures, but they are actually not that frequent. Perhaps one rogue public company per thousand each year makes it into the headlines.
We all know that detecting every problem in a set of accounts would be ruinously expensive, and that a level of risk of error needs to be balanced with the cost of investigation. You will look in vain for this grasp of reality.
The other-worldliness of the report is nicely illustrated by the proposal that the Audit, Reporting and Governance Authority (ARGA – the redesignated Financial Reporting Council, not a misspelt cooker brand) should ‘celebrate’ good audits.
At a time when the UK needs to start setting its own standards again, this report will result in (largely useless) costs, potentially numerous and lengthy disadvantageous disclosures on (for example) going concern risks, failure of internal controls and anti-fraud actions. These, together with the totality of the regulatory deadweight, will result in further acceleration of the decline in UK public markets and increased preference to operate from a non-UK base.
There is a proposal that directors should not be permitted to pay a dividend unless they certify that it would ‘in no way’ threaten the existence of the company in the following two years. That should suppress dividends. Now is when we need to support the economy with sensible and attractive regulation.
Reality bites
But a very real threat is that ARGA will regulate a new audit profession. The current ACA qualification will lose a lot of its value. We would rightly expect the accounting bodies, including ICAEW, to resist as much as they can, but they are remarkably passive. Brydon also pushes the idea that people who have no accountancy qualifications should chair audit committees. Given the complexity of financial reporting nowadays, this is like employing an unqualified surgeon for a heart operation.
Meanwhile, audit committee minutes are to be published, and all non-executives are to attend its meetings. Auditors are to attend risk committees too. My longstanding view that being a patient in a hospice uniquely qualifies you to be a non-executive director seems ever-more appropriate.
Now is the time for the accounting profession to aggressively fight back. There is too much change being planned, too little resource to achieve it, too much damage to the UK as an attractive place to do business, and too many silly things being planned.
The profession needs to resolutely make its case.
About the author
Jon Moulton is a CF and a Fellow of the Institute for Turnaround Professionals. Jon has long experience of turnarounds, having invested in them for 30 years and with considerable success. Jon is currently Chairman of FinnCap, the major AIM broker, The International Stock Exchange and Anti-Microbial Research Limited. He also chairs the Better Capital funds and Greensphere, an alternative energy infrastructure fund.
He regularly writes, broadcasts and speaks on corporate finance and financial matters. Jon is also a Director of the think tank The Centre for Policy Studies and an Honorary Fellow of University College London.