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.

Ben Pruchnie/Getty Images
Show Hide image

Commons Confidential: Fearing the Wigan warrior

An electoral clash, select committee elections as speed dating, and Ed Miliband’s political convalescence.

Members of Labour’s disconsolate majority, sitting in tight knots in the tearoom as the MP with the best maths skills calculates who will survive and who will die, based on the latest bad poll, observe that Jeremy Corbyn has never been so loyal to the party leadership. The past 13 months, one told me, have been the Islington rebel’s longest spell without voting against Labour. The MP was contradicted by a colleague who argued that, in voting against Trident renewal, Corbyn had defied party policy. There is Labour chatter that an early general election would be a mercy killing if it put the party out of its misery and removed Corbyn next year. In 2020, it is judged, defeat will be inevitable.

The next London mayoral contest is scheduled for the same date as a 2020 election: 7 May. Sadiq Khan’s people whisper that when they mentioned the clash to ministers, they were assured it won’t happen. They are uncertain whether this indicates that the mayoral contest will be moved, or that there will be an early general election. Intriguing.

An unguarded retort from the peer Jim O’Neill seems to confirm that a dispute over the so-called Northern Powerhouse triggered his walkout from the Treasury last month. O’Neill, a fanboy of George Osborne and a former Goldman Sachs chief economist, gave no reason when he quit Theresa May’s government and resigned the Tory whip in the Lords. He joined the dots publicly when the Resolution Foundation’s director, Torsten Bell, queried the northern project. “Are you related to the PM?” shot back the Mancunian O’Neill. It’s the way he tells ’em.

Talk has quietened in Westminster Labour ranks of a formal challenge to Corbyn since this year’s attempt backfired, but the Tories fear Lisa Nandy, should the leader fall under a solar-powered ecotruck selling recycled organic knitwear.

The Wigan warrior is enjoying favourable reviews for her forensic examination of the troubled inquiry into historic child sex abuse. After Nandy put May on the spot, the Tory three-piece suit Alec Shelbrooke was overheard muttering: “I hope she never runs for leader.” Anna Soubry and Nicky Morgan, the Thelma and Louise of Tory opposition to Mayhem, were observed nodding in agreement.

Select committee elections are like speed dating. “Who are you?” inquired Labour’s Kevan Jones (Granite Central)of a stranger seeking his vote. She explained that she was Victoria Borwick, the Tory MP for Kensington, but that didn’t help. “This is the first time you’ve spoken to me,” Jones continued, “so the answer’s no.” The aloof Borwick lost, by the way.

Ed Miliband is joining Labour’s relaunched Tribune Group of MPs to continue his political convalescence. Next stop: the shadow cabinet?

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage