Impaired Impartiality?

Matt Dodds, Director at ITM, reacts to the recent auditing stories in the news so far…

 

In a world of conspiracy theories and mistrust is it any wonder auditors are facing a fair and reasonable challenge for “marking their own homework“?

The audit sector has been under an increasing level of scrutiny and criticism, with conflict of interest allegations, scandals and accusations of serious failings.  This has led to the five recent or in-progress reviews in the audit sector.

The Competition and Markets Authority launched a review of the audit sector in October 2018 – the investigation covered three areas: sufficient choice, resilience and incentives.

Sir John Kingman led the review of The Financial Reporting Council (FRC), to assess the FRC’s governance, impact and powers, to help ensure it is fit for the future and on Tuesday 18th December, the review listed 83 separate recommendations, including:

  • The FRC be replaced with a new independent statutory regulator, accountable to Parliament, with a new mandate, clarity of mission, leadership and powers.
  • It would also be renamed as the Audit, Reporting and Governance Authority

Labour’s shadow chancellor, John McDonnell commissioned Professor Prem Sikka to lead a panel review of the audit sector and make recommendations – the results were damning and highlighted the following:

 

Results


  1. The Big Four firms have had a monopoly for too long and should be broken up.
  2. Audit firms should only audit and supply no other service; doing anything other should be a criminal offence.
  3. The Big Four looks after 340 companies listed in the FTSE 350 – this should be capped at 50%.
  4. This monopoly should be broken up – joint auditing, whereupon a small company teams up with a bigger one should be considered as an option.
  5. Auditors should be changed every five years, pitches/tenders should be made publicly available and disclosed upon request.
  6. A state-backed body should be created to carry out audits of financial institutions, and future auditor duties should be set by Parliament.

 

  • The Audit Quality Forum (AQF) was formed in 2004 at the instigation of the UK government – their first priority was to improve audit quality.
    This was supported by the Institute of Chartered Accountants in England and Wales, the Department for Business, Energy & Industrial Strategy and the Financial Reporting Council. The AQF has an impressive legacy of numerous published reports that focus on improving audit quality. They are expected to deliver an interim report in October 2019 that looks to tackle issues of audit quality and business confidence.
  • The FRC announced a review of itself and the sector in its annual ‘Developments in Audit’ report. The review aims to tackle falling trust in business and the effectiveness of audit. It has been widely commented that consulting for audit clients could be banned altogether – there is already a 70 per cent cap on fees for selling non-audit services to existing clients, but these rules are expected to be tightened.
    The October 2018 report mentioned that the improvements shown in previous years had actually reversed.


Alarm bells?


So, what’s the impact of all this on pension schemes? Well, it’s probably a bit of an alarm bell for some. When scheme data needs to be audited, derisking options need to be calculated – the almost natural default is to look to your auditors.

Yes, auditors audit, but pension scheme data is unique, each data row a snap shot that reflects the legislation, accrual rates, scheme rules and myriad other nuances bespoke to the time the data was recorded. This is far more in depth than any checking and balancing exercise.


True independence


To extract, audit, report and cleanse data in a truly robust manner, schemes should look for true independence, there shouldn’t be any ties to the data.
There should be technology available that is tried and tested, that has been developed to meet evolving data objectives as well as changing pensions legislation. This is not where auditors are experts; ask yourself:

Can auditors add value with non-auditing services?
Is it right that in many cases they are responsible for declaring any conflict of interest?
Are they specialist in pension data?
Can they provide the best solution for your scheme?
After the five reviews in progress will that even be an available option?

 

There are certainly a lot of questions to answer for the audit sector, and 2019 looks like it will bring some significant change that could impact many schemes and the processes they have followed year in, year out.

 

Matt Dodds / Director / ITM limited