Les Carrés DSCG - DSCG 6 - Anglais des affaires - 1re - 357

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HOW CAN WE STOP THE AUDITING SCANDALS?
By Jo Horton, from Warwick Business School News, 16 July 2021
The auditing industry and its governance has come under increasingly intense scrutiny in recent years.
In 2020, for example, there were ongoing investigations by the Financial Reporting Council (FRC) in the UK involving
all of the Big 4 accounting firms (EY, PwC, Deloitte and KPMG).
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While in the US, the Securities and Exchange Commission is examining the running of the Public Company
Accounting Oversight Board - the independent body set up in 2002, following the Enron scandal where billions
of dollars of debt were hidden before its collapse, to provide external oversight of auditing in the US.
Much of the attention has focused on the relationship between the major accounting firms and their publicly
- listed corporate clients.
Critics argue that the auditor- client relationship can easily become too close and mutually dependent, undermining
the objectivity and independence needed to deal with reporting irregularities appropriately. Yet, as the
auditing related investigations in the UK and elsewhere demonstrate, efforts to regulate away this problem have
had limited success.
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But this need not be the case. As research conducted with my colleagues Gilad Livne, of the University of Exeter,
and Angela Pettinicchio, of SDA Bocconi School of Management, shows, regulatory measures that mandate
changing the audit firm and partner periodically can have a significant impact on improving audit quality and
thereby reducing financial fraud. The key to the success of these measures is the way in which they are applied.
The corporate financial reporting system is integral to the smooth functioning of financial markets. At its heart is
the complex relationship between auditor and corporate client, as the route to a signed- off set of accounts invariably
involves a process of negotiation between audit partner and the client's audit committee and key executives,
including the CFO and CEO.
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The audit partner's role is pivotal. They are responsible for instigating an auditing process that enables the appropriate
exercising of independent judgement in a specific auditing engagement. They liaise directly with the client
to decide what adjustments may be needed to sign- off the accounts in light of the audit team's findings.
Understandably, a degree of relationship building between auditor and client is necessary to facilitate the audit
process. Historically, however, auditor- client relationships have often extended over many decades.
Take recent FRC investigations as an example - KPMG was with its client Carillion for 19 years before the construction
and facilities giant crashed into liquidation with £7 billion in liabilities. While PwC was with retailer Tesco
for 32 years when the retailer was hit by an accounting scandal in 2014, in which its profits were overstated by
£326 million.
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The auditors are expected to apply professional scepticism when examining the numbers. Clearly, though, there
is scope for the familiarity and financial interdependence developed during a lengthy relationship to compromise
the independence and even, on occasion, the integrity of the audit.
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Les Carrés DSCG - DSCG 6 - Anglais des affaires - 1re

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