The writer is a visiting research fellow at alliance manchester business school
When the global chairman of ey admitted regretlast week over the auditing firms failure to uncover a near-2bn fraud at wirecard, it was yet another black eye for the sector.
The german bundestag is embarking on a full inquiryinto wirecards collapse, but the uk already knows there are major problems in one of its leading industries.
A string of eyebrow-raising company collapses, including retailer bhs and construction company carillion, have prompted three independent reviews in the past two years to recommend a radical overhaul of british auditing, which is dominated by the big four, ey, kpmg, deloitte and pwc.
Yet the uk government has done little. audit reform has been talked about for so long that business school students now produce dissertations on the history of future of the audit studies. many of todays issues were raised in the mcfarlane report in 1992.
There is no lack of consensus around the need for change: auditors have repeatedly failed to warn investors of looming problems.
But politicians have failed to deliver substantive reform that serves the public interest. every company collapse is a potent reminder that society is the auditors ultimate client. the public, not just shareholders, typically bear the costs of mismanagement and fraud. carillions 2018 collapse threw 2,000 staff out of work and landed taxpayers withan estimated bill of 148m.
Government departments and regulatory bodies issue seemingly endless calls for views to establish what reforms need to be pursued and implemented.
This is problematic because it puts officials under pressure to identify the ideal reform and encourages those with material financial interest to criticise and eliminate radical reforms.
We end up with the lowest common denominator. over the years, every aspect in the audit environment has been tinkered with a few more standards here, a bit more oversight there, some additional independence and competition arrangements, a tweak of the professional training curriculum and a shopping list of extra items that auditors should tick off.
But the core concept of auditing has not been updated in decades. it remains largely backward-looking, standards-driven and financial statements-focused. contrast that with an economy that aspires to be digitalised, sustainable and fairer no wonder auditors fall short.
As britain aims to recover from a global pandemic, delivering proper audit reform has never been more important. society needs assurance that the companies it depends on for jobs, investment returns and tax revenues are being run responsibly. i believe last years review by donald brydon, which i worked on, offers a coherent road map for change.
First,fundamental audit reform starts with the concept of audit, not the market for audit services, nor its regulation. if businesses are to fulfil richer purposes and values, then those of auditing must shift too.
The government should enshrine the brydon reviews broader definition of audit in company law: the purpose of an audit is to help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements.
Second, we need to create a safe space for experimentation, true problem solving and innovation. this would broaden the possibilities for reform and allow us to look beyond the standardised definitions of an audit.
Third, if we want auditors to do more, we should make the case for a new, vibrant audit profession. intellectually, it has long been argued that the auditor would serve the public interest if they acted as a form of moral arbiter in business.
In that case, we need to change the auditors benchmark for judging whether confidence in a company, its directors and the information they produce is deserved. rather than just checking that the numbers are correct, they should decide whether the company is abiding by the terms and conditions by which society grants companies a licence to operate.
Now, more than ever, auditors should be inspired by the role they can play to help restore trust in corporate britain, enhance its resilience and, ultimately, build back better.
Chris humphrey, an accounting professor at alliance manchester and a member of the brydon review advisory board, also contributed