Who is auditing the auditors?

The majority of the flak following the failures in the global financial system was 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.

Now with the admission from Tesco that accounting irregularities were in excess of £263 million for its first half accounts the activities of this sector is again coming under closer scrutiny. Auditors are in a very privileged position and their integrity is paramount.

Last 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."

In the US authorities 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.

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.

In many instances 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.