A rash of new books about ‘the problems with audit’ point to a model no longer fit for purpose, although the proposed solutions are nothing new, says Robert Bruce
This article was first published in the September 2018 UK edition of Accounting and Business magazine.
We have a new Big Five in the accounting world. Brooks & Gow & Kells & King & de Beer. They are the authors of three new books arguing, in their different ways, that an apocalypse is facing accountants.
‘Bean counting is too important to be left to today’s bean counters,’ is the thesis of Richard Brooks in his coruscating Bean Counters: The Triumph of the Accountants and How They Broke Capitalism, a claim that might startle many mild-mannered auditors. ‘Today the firms have a very uncertain future,’ say Ian Gow and Stuart Kells in their oeuvre The Big Four: The Curious Past and Perilous Future of The Global Accounting Monopoly. And Mervyn King and Linda de Beer talk of ‘the extinction threat that the audit profession is facing’ in their The Auditor: Quo Vadis?
The story of the Big Four accounting firms may, in the words of Gow and Kells be ‘surprisingly under-documented’. But after any accountants have read through the 342 pages of Brooks’ book, they may feel that such is the relentless and painstaking documentation of scandals down the years, they have been well and truly buried six feet under.
They will get the flavour early on from his remark that ‘history’s most proficient accountants include slave traders and the administrators of the Holocaust’.
All three books do a good job of covering the history and growth of accounting, from Venetian merchants to the 19th century UK railway boom and onwards. Gow and Kells surpass themselves with 1920s ‘scenes of open debauch’ at the household of Nicholas Waterhouse, second-generation senior partner of what was then the strongly Quaker firm of Price Waterhouse. But accountants knew where they stood. Frederick Whinney told accounting students in Birmingham in 1894 that the duty of an auditor was ‘to ascertain whether figures were facts’. And the UK company law concept of a true and fair view and, these days, that the accounts should be ‘fair balanced and understandable’ have stood them in good stead.
Where all the Big Five of our authors do agree is that things started to go awry when American culture began to gain the upper hand. Brooks details the cultural differences that precipitated the rot. After the Great Crash of the 1930s, UK company law enshrined the ‘true and fair view’. In the US, regulators were more concerned with shoring up markets. ‘Instead of broad principles demanding “fair” accounts,’ says Brooks, ‘came a system of specific accounting rules for every part of a company’s financial statements on which investors would rely. In place of judgment, there was a rulebook. And rules could be gamed.’ As Gow and Kells point out: ‘A large truck may comfortably be driven through many of the current standards.’
In the mid 1960s, says Brooks, a finance director at the UK industrial giant ICI recalled: ‘In my day, the auditor was a semi-god.’ And as Brooks makes clear from a study in the same era, when finance people were asked in what circumstances ‘might the client influence the auditor to accept its view’, British stockbrokers and Stock Exchange officials unanimously said that there were none. Their Wall Street counterparts, however, overwhelmingly replied that US auditors would accede to a client’s wishes. ‘Accountants are so tied to the corporations whose financial statements they audit,’ was one typical response, ‘that they are unable to bite the hand that feeds them”.’ The steady corruption of UK business culture had begun.
At the end of their accounts our Big Five authors suggest ways forward. Brooks closes his book with this call to arms: ‘Underpinning these recommendations is the need for accounting to be as independent as possible from those with incentives to account falsely. The story of the bean counters shows that when they are objective and brave, they protect and transform the world for the better. When they are biased or weak, catastrophe soon follows. It is time to reckon with the value of accounting and to count the beans properly.’
For Gow and Kells, the future is bleak: ‘Auditing is an old technology, institutionally entrenched for now, but rapidly reaching its use-by date.’ For King and de Beer the slow pace of regulation, standard-setting and original thinking about audit amounts to ‘insanity’. Brooks recommends the separation of accounting and consulting arms, the breaking up of firms into eight, or perhaps 12 entities, and the auditing of ‘the largest, systemically important financial businesses’ to become a public function. As with so much on the current global scene, uncertainty has the upper hand.
Robert Bruce is an accountancy commentator and journalist
"Where all of our authors do agree is that things started to go awry when American culture began to gain the upper hand"