Auditing the Auditors

In recent times the flak following the recent failures in the global financial system has been largely directed at one sector i.e. the Banking industry. One group of participants have remained largely unscathed for their part in the train wreck, the Auditors.

There are now signs that the activities of this sector is coming under closer scrutiny.

Auditors are in a very privileged position and their integrity is paramount.

In the US authorities have filed criminal and civil charges against a former senior partner at accountancy giant KPMG over alleged insider trading.

It is claimed that Scott London passed information to a golfing friend, who then traded on the share tips.

KPMG resigned earlier this week as auditor to US companies Herbalife and Skechers after claims about its Los Angeles-based partner emerged.

However it is not just about illegal activity, there are many instances of conflict of interest such as taking on consultancy work for Clients and becoming too cosy with management teams.

John Griffith-Jones, the former boss of KPMG (and now head of the Financial Control Authoity) is under pressure after it emerged that he was involved in setting the terms of an investigation into the collapse of HBOS despite the fact that KPMG were auditors to HBOS from 2001 to 2009.

At the lower end of the scale it is all too easy for companies to bully the young staffers sent in to do the grunt work.

What chance has a newly appointed auditor walking around a factory warehouse to adequate value stock?

In reality they have to rely on the company for “valuations” and this can result in a totally inaccurate picture being presented. Very often the senior management of the company being audited and the auditors can end up signing off on a “nod and a wink”.

The validity of a company's accounts reflects both the integrity of the company which is being audited and that of it's auditors.