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.

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“Brexit is based on racism”: Who is protesting outside the Supreme Court and what are they fighting for?

Movement for Justice is challenging the racist potential of Brexit, as the government appeals the High Court's Article 50 decision.

Protestors from the campaign group Movement for Justice are demonstrating outside the Supreme Court for the second day running. They are against the government triggering Article 50 without asking MPs, and are protesting against the Brexit vote in general. They plan to remain outside the Supreme Court for the duration of the case, as the government appeals the recent High Court ruling in favour of Parliament.

Their banners call to "STOP the scapgoating of immigrants", to "Build the movement against austerity & FOR equality", and to "Stop Brexit Fight Racism".

The group led Saturday’s march at Yarl’s Wood Immigration Detention Centre, where a crowd of over 2,000 people stood against the government’s immigration policy, and the management of the centre, which has long been under fire for claims of abuse against detainees.  

Movement for Justice, and its 50 campaigners, were in the company yesterday of people from all walks of pro and anti-Brexit life, including the hangers-on from former Ukip leader Nigel Farage’s postponed march on the Supreme Court.

Antonia Bright, one of the campaign’s lead figures, says: “It is in the interests of our fight for freedom of movement that the Supreme Court blocks May’s attempt to rush through an anti-immigrant deal.”

This sentiment is echoed by campaigners on both sides of the referendum, many of whom believe that Parliament should be involved.

Alongside refuting the royal prerogative, the group criticises the Brexit vote in general. Bright says:

“The bottom line is that Brexit represents an anti-immigrant movement. It is based on racism, so regardless of how people intended their vote, it will still be a decision that is an attack on immigration.”

A crucial concern for the group is that the terms of the agreement will set a precedent for anti-immigrant policies that will heighten aggression against ethnic communities.

This concern isn’t entirely unfounded. The National Police Chief’s Council recorded a 58 per cent spike in hate crimes in the week following the referendum. Over the course of the month, this averaged as a 41 per cent increase, compared with the same time the following year.

The subtext of Bright's statement is not only a dissatisfaction with the result of the EU referendum, but the process of the vote itself. It voices a concern heard many times since the vote that a referendum is far too simple a process for a desicion of such momentous consequences. She also draws on the gaping hole between people's voting intentions and the policy that is implemented.

This is particularly troubling when the competitive nature of multilateral bargaining allows the government to keep its cards close to its chest on critical issues such as freedom of movement and trade agreements. Bright insists that this, “is not a democratic process at all”.

“We want to positively say that there does need to be scrutiny and transparency, and an opening up of this question, not just a rushing through on the royal prerogative,” she adds. “There needs to be transparency in everything that is being negotiated and discussed in the public realm.”

For campaigners, the use of royal prerogative is a sinister symbol of the government deciding whatever it likes, without consulting Parliament or voters, during the future Brexit negotiations. A ruling in the Supreme Court in favour of a parliamentary vote would present a small but important reassurance against these fears.