In a hard-hitting editorial, the Financial Times today branded the UK’s audit industry ‘a cancer in the body corporate’ and called for change
Responding to its own investigation into what it describes as ‘the flawed audit market’ the paper focuses on accounting standards, blaming them for failing to prevent investors being misled or ‘to curb aggressive, even criminal, reporting practices’.
‘The rules are no longer fit for purpose,’ says the FT, accusing the Big Four of being no more than ‘tick box administrators’.
The FT singles out IFRS 9 as being a possible solution to the problem of lack of investor trust in the audit process. ‘While abstruse, its core concept is that companies should set aside bad debt provisions early and prudently, rather than doing so only when they already have incurred losses. The rule combines fair value accounting with the more cautious approach of predecessor standards.’
‘This pragmatic approach should be extended to all areas and combined with a principle that profits hew close to cash flow to curb the abuse of models and projected earnings,’ say the paper.
It concludes: ‘The audit market needs to recover its original purpose of assuring investors and the public of the truth and fairness of accounts. Reforming the rules would be a critical first step’.
IFRS 9, the new international financial reporting standard for financial instruments, specifies how an entity should 'classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items', and requires an entity to recognise a financial asset or a financial liability in its statement of financial position 'when it becomes party to the contractual provisions of the instrument'.
The standard brings fundamental changes to the accounting of financial instruments and will replace IAS 39: Financial Instruments: Recognition and Measurement, coming into effect for annual periods beginning on or after 1 January 2018.
The UK’s audit industry has recently been shaken by several scandals, in particular the collapse of construction giant Carillion. KPMG, one of the Big Four and the company’s auditor for 19 years, was attacked in the final report from an inquiry carried out into the collapse by the Work and Pensions Committee and the Business, Energy and Industrial Strategy (BEIS) Committee. KPMG was accused of failing to investigate ‘fantastical figures’ and ‘failing to exercise professional scepticism towards Carillion’s accounting judgements’.
The FT leader: Reform accounting rules to restore trust in audit can be found here.
Report by Rob Munro
