The statutory audit continues to generate headlines, with reforms being either supported or attacked. Expectations of the audit process can rapidly exceed what can reasonably be delivered. There is a danger that misconceptions about the audit's role will lead to counterproductive attempts to bolster the robustness of the audit opinion.
Take the debate over the effect of the introduction of international accounting standards (IAS), which partially replace the concept of "true and fair view" by "presents fairly". Some investor groups have argued that this undermines the robustness of the audit opinion, through a shift away from the traditional UK approach of over-arching judgements based on general principles towards a US style of "tick box" or rules-based audit processes.
The Financial Reporting Council (FRC) has come out firmly against these concerns with a vote of confidence in the system, rejecting the notion that these technical reforms have weakened the UK audit. Ultimately it will be for the courts and regulatory bodies to determine whether this is the case. What seems certain, however, is that the FRC is unlikely to have won over all its detractors. Is there not a danger that the problem underlying this debate is the more fundamental issue of what it is that the investor and business communities think auditors do? What is the statutory audit designed to safeguard against? Until these questions are addressed and there is clarity between service providers and consumers, issues about the niceties of any particular reform seem academic.
Some of those expressing concerns appear to expect the audit to function like a form of commercial guarantee; a bastion against corporate scandal and a blanket protection for the company and its directors against their own commercial mismanagement. These expectations are misplaced. This firm has defended many misconceived lawsuits brought against auditors over the years. The problem often arises because the claimant has a skewed view of the auditor's role. The audit is not an exercise in verifying or double checking commercial management. Auditors do not underwrite a company's commercial viability. It is easy to forget that primary responsibility for safeguarding against corporate scandal can only lie with the business principals. One cannot help but surmise that the focus on the audit role is largely aimed, certainly in the context of litigation, at what is perceived to be behind the auditor -- its deep pocket.
Let us assume that what the business community realistically understands it has from an audit is, not an insurance policy against any commercial error, but an opinion that a company's financial statements show a true and fair view at a particular point in time. Are the government's proposals to introduce a limited form of proportionate liability by contract for auditors then to be welcomed? No other professional is required in the same way to accept unlimited legal liability. Refusing limitation would only seem likely to encourage the profession to focus on the ticking of boxes to avoid the exposure of subjective judgements. Allowing auditors some scope to limit their liability should help to resist any trend for auditors to seek refuge in form over substance in the audit process.
The government is also considering introducing a criminal offence of "recklessly" giving an audit opinion. What exactly is involved in recklessness in this context is hard to define and even harder to apply. The mere risk of a prosecution may destroy an auditor's career. If, as is likely, the offence were to result in a risk of criminalisation in a swathe of circumstances, this too would create irresistible pressure towards form over substance. Excessive criminalisation would also frustrate swift and effective operation of the regulatory regime and civil litigation.
How unattractive does auditing need to become before the big four and others find it impossible to recruit quality staff and encourage their best partners to stay in audit? It may be that there is more that unites auditors, investors and the public when it comes to what will really bolster the giving of robust audit opinions. Conversely, initiatives based on unrealistic expectations will only fuel more speculative, expensive and ultimately unsuccessful litigation. That cannot be in the investment communities' interests.
Clare Canning is head of commercial litigation and James Roberts an associate in the commercial litigation team at Barlow Lyde & Gilbert, who currently act for Ernst & Young in the Equitable Life litigation. Under syndication arrangement with FE