Accountancy and Law Column;
Failure of Auditing to Deliver Accountability
Professor of Accounting
University of Essex
(Published in The Herald, 4
the Enron and WorlCom Scandals, the US secured a criminal conviction of Arthur
This was followed by the Sarbanes-Oxley Act, independent regulation of
and forcing company executives to accept personal responsibility for
credibility of annual accounts. The Securities & Exchange
forced hundreds of companies to revise their accounts and also
company executives and their advisers.
typical fashion, British corporate interests stymied the debate by
that ‘it couldn’t happen here’ even though it has and will. Instead of
reforming accountancy and auditing practices, the Department of Trade
Industry (DTI) stirred apathy by appointing artificial reviews of
regulation to ensure that no change took place because the accountancy
interests do not want any. This exercise in impression management
usual pattern of cover-up, silence and obfuscation. The 1990s collapse
Bank of Credit and Commerce International (BCCI), Polly Peck, Levitt
Hotels resulted in loss of jobs, homes, savings, bank deposits and
none have been subjected to an independent investigation. Reports on
Moat Houses and Transtec are yet to be published. Ministers continue to
calls for an independent investigation of the auditing industry.
firms continue to act as advisers to companies and their executives and
pretend to audit the very transactions that they helped to create.
businesses spend over one billion pounds a year on compulsory audits.
deliver precious little, other than a fat fee for accountancy firms.
Contemporary company audits are a creature of the late nineteenth and
twentieth centuries. At that time large scale multinational companies
virtually unknown. Electronic money transfers did not exist. Complex
products, such as derivatives, options and various hedges had not been
developed. Ex-post audits were conducted to assure the public that
verified the existence of assets and liabilities. Today’s environment
removed from that. Yet no questions have been raised about the ability
conventional audits to deliver anything.
closure of the fraud-ridden BCCI showed that multinational banks are
of being audited even by the world’s largest accountancy firms. In a
instantaneous transfers of money, ex-post audits cannot verify much.
they can, much of the money has already flown and cannot be recovered
protect depositors and savers. Paradoxically, as companies have become
and complex, auditors have reduced the number of transactions that they
examine. This helps to increase firm profitability, but is sold to the
as some kind of a scientific sample-based audit. Auditors effectively
Russian roulette with the lives of stakeholders.
than producing things, many companies now speculate on the stock and
markets. They place clever bets to manage or transfer risks. Money
become a commodity. Values of many hedge funds, derivatives and options
dependent upon uncertain future events. The collapse of the Long Term
Management (LTCM) showed that even the economics Nobel Prize winners
anticipate the future events and calculate the value of these products.
had to be bailed out by the Federal Reserve with $3.5 billion of
monies. The same products also played a
major part in the troubles at Enron, NatWest Markets, Sumitomo,
Irish Banks, and other cases. Company auditors are certainly no Nobel
They cannot verify the value of financial markets and cannot outguess
market conditions to attest any numbers dreamt up by company directors.
audit reports remain silent about such difficulties and aren’t worth
they are written on.
audits are costly and deliver little protection to stakeholders. A
about the limits and value of company audits is long overdue. They need
replaced by new institutional structures that enable stakeholders to
monitor large businesses.