Big 4 under the spotlight…
Recent findings have shown that Britain’s audit firms did not raise alarms for three-quarters of the major companies that collapsed over the past decade. This raises questions about the importance of ethical standards, regulatory oversight, and the need for ongoing improvements in the auditing profession.
The Role of Auditors
Auditors play a critical role in the business ecosystem. Their primary responsibility is to assess whether a company’s financial statements accurately reflect its financial position, thereby providing confidence to shareholders, suppliers, and customers. A report from the Audit Reform Lab at the University of Sheffield has highlighted areas for improvement in this process. Of the 250 largest companies listed on the London stock market that went under between 2010 and 2022, only a quarter had a “going concern” warning from their auditors in their final accounts. This finding emphasises the need for continuous enhancement in auditing practices.
Learning from Corporate Collapses
High-profile corporate failures such as Thomas Cook, BHS, and Carillion illustrate the significant impact of auditing practices. The Financial Reporting Council (FRC) has provided insights into the audits of Carillion, which revealed areas where auditing practices could be strengthened. Ensuring thorough and diligent audits is crucial to maintaining trust in the auditing profession and protecting stakeholders.
Balancing Client Relationships and Professional Scepticism
Adam Leaver, director of the Audit Reform Lab, points out the importance of maintaining a balance between good client relationships and rigorous scrutiny. He emphasises that professional scepticism is essential for effective auditing. This balance is particularly important for the Big Four auditing firms — Deloitte, EY, KPMG, and PwC — which play a significant role in the market.
Performance Analysis of the Big Four
The Audit Reform Lab’s analysis shows varied performance among the Big Four firms. EY issued “going concern” warnings in 20% of cases where the companies they audited later went bankrupt, while PwC did so in 23% of cases. Deloitte and KPMG issued warnings in 36% and 38% of cases, respectively. To put this into other words, the vast majority of companies that went bust did not have a going concern warning from their auditors. These figures highlight the importance of continuous improvement in auditing practices. It is important to note that these firms collectively audit most of Britain’s largest companies and earned 98% of all audit fees from FTSE 350 firms in 2022. Their role in maintaining market stability is vital.
Proposals for Enhancing Auditing Practices
Leaver and his team advocate for enhancements to address identified areas for improvement. One major proposal is the establishment of the Audit, Reporting and Governance Authority (ARGA), a strengthened version of the current FRC. This new body would have greater powers to enforce standards and ensure best practices. These proposals aim to bolster trust in the auditing process and ensure that auditors act in the public interest.
Implications for Business Students
For business students, these findings and proposed enhancements provide valuable lessons. First, they highlight the importance of ethical standards and professional integrity in all business practices. Aspiring business leaders must understand that maintaining independence and objectivity is essential, particularly in roles that require oversight and accountability.
Second, the case underscores the need for robust regulatory frameworks. Effective regulation not only protects stakeholders but also ensures a fair and competitive business environment. Future business leaders should advocate for and contribute to the development of such frameworks.
Finally, the varied performance of auditing firms serves as a reminder of the importance of continuous improvement. Even the most established firms can benefit from ongoing evaluation and enhancement of their practices. Business students should strive to foster a culture of continuous learning and improvement in their future careers.
Conclusion
The recent findings about Britain’s audit firms underscore the importance of robust auditing practices. For business students, these issues provide valuable insights into the importance of ethical standards, regulatory oversight, and the need for continuous enhancement in the auditing profession. By understanding and addressing these challenges, future business leaders can help create a more transparent, accountable, and trustworthy business environment.
