Jonathan Ford writes on the aim of the UK government to raise audit standards. There is plenty of evidence that accounting rules are in fact part of the problem.
Last week, ministers charged the bloodhounds of the Competition and Markets Authority with establishing whether auditing as a trade was “competitive and resilient enough” to maintain high standards. This came on top of a review already requested from John Kingman, an ex-Treasury mandarin, into the effectiveness of the audit regulator, the FRC.
Much of the focus of the government’s inquiries is on the operation of the audit market and whether it contributes to aggressive accounting.
Take the collapse in January of Carillion, which came about after the UK outsourcing group restated contracts on which it had previously and mechanically written up substantial unrealised profits. No doubt the presentation obeyed the intricate box-ticking rules concerning the recognition of these “surpluses”. But it was a nonsense that led ultimately to the erasure of the prior six years’ worth of dividend (and bonus) bearing earnings, as well as the company’s demise.
At the root of the problem lies a confusion over the purpose of accounts. Originally designed to give external owners the information to hold managers to account, they were audited to give formal assurance that the capital was not being abused by fraudulent or over-optimistic bosses.
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