Lord Prem Sikka, Professor of Accounting at the University of Sheffield and Emeritus Professor of Accounting at the University of Essex, delivered an insightful speech on the importance of transparency and addressing deficiencies in external audits following the collapse of many household names on the British High Street.
As a profession popular among British Indians, accounting and finance connects with and impacts many across the diaspora communities. These excerpts from the peer’s recent address in the House of Lords highlight matters of deep concern when professional audit failures result in well-loved businesses going bankrupt, leaving workers in the lurch for no fault of their own.
This year, the King’s Speech promised an audit reform and corporate governance Bill. Naturally, I look forward to it. I have a particular interest in that Bill, not only as an accountant with 56 years’ experience but as an adviser to the Work and Pensions Committee for its investigation into the collapse of BHS and Carillion.
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Despite Brexit, the UK has abandoned its powers to set accounting and auditing standards relevant to the local environment. Instead, it adopts international accounting and auditing standards. These are primarily crafted by big corporations and accounting firms at both international and UK level. This makes for poor financial reports, audits and public accountability. Good luck to anyone trying to figure out the UK profits of Google, Microsoft, Starbucks, Apple or other global corporations. Water companies routinely inflate investment and distributable reserves by capitalising interest and repair and maintenance payments. It is all permitted by the accounting rules and no auditor has ever objected to it. Profit shifting is a major tool for avoiding tax, but group accounts provide zero information about intragroup transactions, so it is hard to see how the Chancellor will clamp down on tax abuse by companies. I look forward to hearing from the Minister how the government will address regulatory capture and reform accounting practices.
There are fundamental fault lines. In contemporary society, we come across numerous types of audits on a daily basis. For example, at airports, our passports are audited by immigration officers acting as auditors. In no case is the auditee allowed to hire, remunerate or fire the immigration officer or appoint him or her as an adviser, yet that is the starting point for company financial audits.
It is hard to think of any financial scandal highlighted by auditors. At BHS, PricewaterhouseCoopers’s audit partner backdated the audit report to appease Philip Green and other directors. At Carillion, KPMG never objected to imprudent accounting policies relating to accounting for good will. The company also capitalised interest payments to inflate its balance sheet. At Patisserie Valerie, auditors did not even check the bank reconciliation; they just continued to dish out the usual clean audit bill of health. Naturally, they were not going to bite the hand that feeds them.
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There is an urgent need for transparency about the delivery of audits. This would enable stakeholders to make assessments of the quality of audit and ask focused, timely questions. Currently, we get a glimpse of audit problems only after scandals; if by hook or crook a company survives, poor auditing practices remain buried.
For far too long, audits and audit firms have escaped transparency. That silences stakeholders and leads to poor audits and accountability. I hope that the government will address these failures.
*Full Speech & Response: ‘External Auditing of Companies: Deficiencies’