Audit firms should ditch sales culture

UK watchdog flags up concerns.

I have no problem with audit firms providing some consulting services to audit clients provided it does not impair an auditor’s independence but there’s one thing that grates me about the audit profession. It’s when firms use audit as a lead-in to sell more lucrative consulting services. What is icing to this distasteful cake is when audit staff are praised for their role in winning consulting work.

This month, a UK watchdog responsible for checking the quality of audit firms released inspection reports of a few larger firms, flagging concerns PKF and Mazars had been praising and/or rewarding audit staff that successfully sold ‘non-audit’ or consulting services to audit clients. There reports apply to inspections carried out in 2010.

In the PKF report, the AIU warned the firm should: "Ensure credit is not sought or given in appraisals for success in selling non-audit services to audited entities."

In the Mazars report, it was recommended the firm: "Ensure that staff and partner remuneration and evaluation decisions do not reflect success in selling non-audit services to audit clients… [and] there is greater focus on audit quality indicators in appraisals for audit partners and staff."

To single out Mazars and PKF based on one inspection report is unfair. Rumours about auditors up-selling consulting have been rife for many years. Consulting is more lucrative and less labour intensive than audit, and firms all over the world, particularly the Big Four – PwC, Deloitte, Ernst & Young and KPMG – are beefing up their consulting arms like never before.

The problem with firms providing too much consulting to audit clients is the fear that they become reliant on that revenue and it will affects an auditor’s ability to exercise professional judgement. There’s also the argument that auditor’s might feel uncomfortable auditing a colleague’s consulting or tax work.

Although most consulting services are prohibited to audit clients, firms are still earning a significant amount of revenue from this practice. In 2011, PwC UK earned £363m from non-audit services to audit clients, which is about 40 per cent of the fees it earns from audit, while Deloitte made £185m, which is 36 per cent of its audit revenue.

The independence of auditors is a big issue for the accounting profession because, rightly or wrongly, questions are being raised as to why auditors gave a clean bill of health to banks such as Lehman Brothers just before they collapsed.

The EC has proposed radical reforms that could force the largest accounting firms in Europe to break up their audit businesses from advisory and tax. If such a proposal were to pass into law, it could threaten the existence of the four major brands – PwC, Deloitte, Ernst & Young and KPMG – although intensive lobbying from the ‘Big Four’ should derail this idea.

Nevertheless, auditors of all sizes could make their lives a whole lot easier if they ditched the sales culture and focussed on ensuring their clients accounts are in check, rather than worrying about their own.

Arvind Hickman is the editor of the International Accounting Bulletin.

Photograph: Getty Images

Arvind Hickman is the editor of the International Accounting Bulletin.

Photo: Getty
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Theresa May is paying the price for mismanaging Boris Johnson

The Foreign Secretary's bruised ego may end up destroying Theresa May. 

And to think that Theresa May scheduled her big speech for this Friday to make sure that Conservative party conference wouldn’t be dominated by the matter of Brexit. Now, thanks to Boris Johnson, it won’t just be her conference, but Labour’s, which is overshadowed by Brexit in general and Tory in-fighting in particular. (One imagines that the Labour leadership will find a way to cope somehow.)

May is paying the price for mismanaging Johnson during her period of political hegemony after she became leader. After he was betrayed by Michael Gove and lacking any particular faction in the parliamentary party, she brought him back from the brink of political death by making him Foreign Secretary, but also used her strength and his weakness to shrink his empire.

The Foreign Office had its responsibility for negotiating Brexit hived off to the newly-created Department for Exiting the European Union (Dexeu) and for navigating post-Brexit trade deals to the Department of International Trade. Johnson was given control of one of the great offices of state, but with no responsibility at all for the greatest foreign policy challenge since the Second World War.

Adding to his discomfort, the new Foreign Secretary was regularly the subject of jokes from the Prime Minister and cabinet colleagues. May likened him to a dog that had to be put down. Philip Hammond quipped about him during his joke-fuelled 2017 Budget. All of which gave Johnson’s allies the impression that Johnson-hunting was a licensed sport as far as Downing Street was concerned. He was then shut out of the election campaign and has continued to be a marginalised figure even as the disappointing election result forced May to involve the wider cabinet in policymaking.

His sense of exclusion from the discussions around May’s Florence speech only added to his sense of isolation. May forgot that if you aren’t going to kill, don’t wound: now, thanks to her lost majority, she can’t afford to put any of the Brexiteers out in the cold, and Johnson is once again where he wants to be: centre-stage. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.