Auditing the Auditors

The majority of 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 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.

Earlier this year in the UK subprime lender Cattles has launched a multimillion-pound claim for damages against PwC, alleging “audit negligence” for failing to spot major holes in its accounts in 2006 and 2007.

Cattles said the failure resulted in it piling up £1.6bn in debts and liabilities, bringing the FTSE 250 firm to the brink of collapse and forcing it to suspend shares in 2009.

A spokesman for Cattles said, "After a thorough, independent and objective review of the merits of this claim, it is clear to us that PwC were negligent in their role as auditors. As a consequence, Cattles and its creditors suffered very significant losses."  

Meantime in the US authorities have brought criminal and civil charges against  former senior partners at accountancy giants KPMG and Deloitte Touche over alleged insider trading.

 

However it is not just about negligence or 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. 

Back in April, John Griffith-Jones, the former boss of KPMG (and now head of the Financial Control Authority) was 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.

Recently it was announced that the former head of HMRC Dave Hartnett was joining Deloitte who have helped large corporations avoid large tax bills.

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. For example 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 its auditors.