With accounting and audit undergoing yet another round of reviews, the chances of anything genuinely beneficial coming out of the process are slim, says Robert Bruce
This article was first published in the January 2019 UK edition of Accounting and Business magazine.
An old Dutch friend of mine has always revelled in telling what he describes as the oldest of British jokes: the headline ‘Fog in the Channel, Continent isolated’. And looking ahead at what 2019 may hold, it is hard not to see that fog enveloping all of our business, accounting and political activities. The only safe prediction is that of chaos.
An outbreak of reviews of all parts of the accounting profession and its regulators can only add to this (see page 68). The role and powers of the Financial Reporting Council (FRC) are being investigated by an independent review set up by the government. The Labour Party has set up its own independent review of the whole UK accounting and auditing regime, led by the indomitable character that is Professor Prem Sikka. And the House of Commons Select Committee on Business, Energy and Industrial Strategy has launched a programme of hearings on the future of audit, the state of which its chairman Rachel Reeves has said is ‘broken’.
So the whole world of accounting and audit starts the year in turmoil and will probably remain so. Some of these reviews will advocate destruction, some will advocate a tightening of purpose, and some the thoughtful change and reform that is urgently required. But overall the spectrum tilts towards the advocacy of crushing regulatory change aimed at satisfying zealots on all sides.
The problem is the old one. No one learns. The last wave of regulatory reform to sweep the accounting world resulted in the formalisation of auditor rotation. Now, some years into the experiment, it is clear that the warnings that it was a seductive theoretical proposal that would only bring the opposite of its intentions into play have proved correct.
The opening up of the audit market to other players has not happened, and a hugely expensive exercise in swings and roundabouts has helped no one. The Big Four firms are still there. Their clients have merely swapped around and paid out a fortune in fees, beauty parades and adjusting to new auditors, all at the behest of the regulators.
The problem is that if the whole regulation game is played out by politicians of every hue, who traditionally know the least and have the least feel for what the outcomes will be, the results will always be a long way from the original, though naïve, intentions. There will be much more of this as 2019 unfolds.
Meanwhile, the area where efforts would be best employed will continue to escape attention. Adrian Cadbury, the late architect of the original Cadbury Code on Corporate Governance, would weep. The framework that the code created is much praised around the world, but in the UK the fundamental principle that has gradually brought about so much cultural corporate change – the idea of ‘comply or explain’ – has become a phrase spat out as a scathing insult in some reformist quarters.
Shoot the messenger
With the fog of regulatory reform hanging heavy, it is the corporate world that quietly escapes unscathed. The tactic of encouraging reformers to shoot the messenger has won.
Many surveys, including one by ACCA, show that significant numbers of people fondly believe that auditors, rather than the directors in command of a company, are there to prevent corporate failure. The FRC’s Audit quality thematic review: other information in the annual report issued by the FRC at the end of last year, revealed the deficit (see box). It looked at the audit work on the areas of an annual report – such as the remuneration report, directors’ report and strategic report – that many people believe comes under the auditors’ certification, when it does not.
This is what enables company directors to wriggle free of their responsibilities and encourages auditors to be less than tough in holding directors’ feet to the fire on whether the information they are providing is genuinely ‘fair, balanced and understandable’, as the law now insists.
It is areas like this, for example, where the great 2019 festival of reviews should concentrate. Otherwise, the accounting world will remain lost in a continuing fog brought about by ill-intentioned but plausible regulation.
Robert Bruce is an accountancy commentator and journalist.
"With the fog of regulatory reform hanging heavy, it is the corporate world that quietly escapes unscathed"