22 July 2013

Jonathan Guthrie: Watchdog bottles out of auditing challenge

Writing for the FT, Guthrie says that although British sportsmen may no longer bottle out of big challenges, the propensity lives on at the Competition Commission, which has decided against mandatory switching of auditors.

The organisation may never again be in a better position to inject life into the dusty market for accounts verification. All forms of groupthink are under attack in the wake of the financial crisis, most notably in the banking industry. Yet bean counters have been let off the hook, subject only to compulsory tendering by FTSE 350 clients every five years.

The case for rotating your auditors – which conjures images of a carousel to which accountants grimly cling – is a respectable one. New eyes spot old oversights. Switching encourages groups to sell audit for what it is worth rather than a loss leader for consultancy.

Instead, the audit industry will continue to resemble a Tunnel of Love, a fairground ride in which couples cuddle aboard boats drifting on an artificial stream. The market favours incumbents because choice of auditor has little effect on client competitiveness. Bonds between Big Four auditors and big companies are reinforced by the tendency of agency accountants to hop across into finance director jobs. The average audit tenure is 48 years.

The homeopathic tendency has also been at work diluting EU proposals, setting a deadline for auditor-switching at 25 rather than 12 years. But some investors are less accommodating. USS and RPMI Railpen, two big pension funds, plan to vote against the reappointment of auditors after 15 years’ service. They show the backbone the Commission lacks.

Full article (FT subscription required)

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