A tighter rein on auditors, please: Numerous recent fiascos ought to make these firms more accountable to the public, not less, as they are demanding, says Austin Mitchell

THE long litany of audit failures - Rolls Razor, Vehicle and General, London and Counties, Milbury, Sound Diffusion, Maxwell, BCCI, Polly Peck, London United Investment, Levitt and countless others - tells us something is wrong with audit. But since only the failures break surface we don't know how bad the rest are.

What we do know is that all these businesses were audited by some of the biggest auditing firms, and in every case they gave an unqualified opinion that proved not to be correct when the firm failed.

In my view, three factors contribute to audit failures. One is that auditors sometimes use audits as loss-leaders. Another is that they can get too close to management so conflicts of interest are glossed over.

A third is that shareholders are allowed no information about the company-auditor relationship, even though proper audits might in some cases have prevented loss of pensions, bank deposits, investment and jobs.

Such fiascos should result in legal action against auditors - the only safeguard currently available. Yet the Government has failed to take any, and even rewards the firms implicated with lucrative contracts. Former ministers work for the biggest auditing firms while auditors' trade associations, masquerading as professional accountancy bodies, are closely identified with those big firms. Despite adverse DTI reports and the implication of the big firms in scandals, none of their partners has ever been disqualified from public practice.

In a perfect world these sorts of scandal should produce some self-examination. The firms that enjoy a statutory monopoly of the external auditing function should improve their standards and make themselves accountable. Better audits are the only real safeguard.

Yet instead of setting out to ensure them, the big firms and the Institute of Chartered Accountants in England & Wales (ICAEW), which acts as their front-man, are lobbying Government for anti-consumer legislation for their own benefit. Their aim is to protect negligent auditors from the consequences of their own failures by a 'cap' on liability. Under these proposals, auditors would be able to fix the extent of their liability.

Company costs would rise since all directors would have to take out compulsory liability insurance. Yet the threat of the one sanction - the legal one - against auditors would be removed.

The auditing industry claims to be an unfair victim of lawsuits because it has 'deep pockets'. In fact the firms do not publish any audited information about their affairs, though it is clear that when they give possible liabilities as a proportion of fee income they exaggerate it by giving only audit fee income where they should include all the services sold on the back of audit. The real litigation threat is in the United States, not here where the law as it stands offers all too little protection to shareholders.

Auditors do not owe a 'duty of care' to individual shareholders or creditors but to the company. In effect, only directors can bring a lawsuit against negligent auditors. Moreover, how do we find out when auditors are negligent? When a company goes bust the case is clear, but by then the company is dead. Seeking restitution through the courts is not cheap. Only the wealthy and persistent can go. When they get there, judges attach considerable importance to the profession's guidelines, invariably prepared by the 'insiders' to protect auditors with little regard to the interest of the investing public.

Buy a can of soup and we have consumer rights. Buy a can of auditing worms and there are none. DTI inspectors' reports regularly show that audits have been faulty. No firm has ever returned the audit fee. Individual shareholders may vote on the appointment and remuneration of auditors. They have no recourse against auditors, no matter how negligent. Most lawsuits against auditors are by other auditing firms acting as receivers.

There is no economic, moral or ethical reason for any further concessions to the auditing industry. The whole of it should be brought under the control of an independent regulator who can clean up the profession. Corporate shareholders pay auditors and auditors should owe them a 'duty of care'.

Shareholders should be able to bring actions against auditors. Anyone hiring a solicitor can examine his/her working papers. Why shouldn't shareholders be able to examine auditors' working papers to assess audit effort and quality? They should also have sight of the audit tenders.

Perhaps the current auditing industry is simply incapable of rising to the challenge of modern, complex businesses. In that case, we need alternative structures to protect the people from fraudsters. What we don't need is to absolve the only police force we've got from its responsibilities to do better and better work.

Austin Mitchell is the Labour MP for Great Grimsby.

(Photograph omitted)

Arts & Entertainment
Ricky Gervais at a screening of 'Muppets Most Wanted' in London last month
tvAs the second series of his divisive sitcom 'Derek' hits screens, the comedian on why he'll never bow to critics who habitually circle his work
Arts & Entertainment
Don (John Hamm) and Megan (Jessica Paré) Draper are going their separate ways in the final series of ‘Mad Men’
tvReview: The suits are still sharp, but Don Draper has lost his edge
News
news
Life & Style
Going down: Google's ambition to build an elevator into space isn't likely to be fulfilled any time soon
techTechnology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
VIDEO
News
David Cameron sings a hymn during the enthronement service of The Most Rev Justin Welby as Archbishop of Canterbury, at Canterbury Cathedral last year
news
Life & Style
From long to Jong: Guy Pewsey outside Mo Nabbach’s M&M Hair Academy in west London before the haircut
fashionThe Independent heads to an Ealing hairdressers to try out the North Korean dictator's trademark do
Sport
Vito Mannone fails to keep out Samir Nasri's late strike
sportMan City 2 Sunderland 2: Keeper flaps at Nasri's late leveller, but Black Cat striker's two goals in 10 minutes had already done damage
Extras
indybest10 best smartphones
News
peopleRyan Gosling says yes, science says no. Take the A-list facial hair challenge
Arts & Entertainment
tvCreator Vince Gilligan sheds light on alternate endings
News
Paul Weller, aka the Modfather, performing at last year’s Isle of Wight Festival in Newport
people
Arts & Entertainment
Play It Forward: the DC Record Fair in Washington, US
musicIndependent music shops can offer a tempting alternative to downloads on Record Store Day
Sport
video
News
Supermarkets are running out of Easter Eggs
Deals make eggs cheaper than normal chocolate
Life & Style
Wasp factory: 1.3 million examples of the Vespa scooter have been sold in the last decade
motoringIconic Italian scooter still revving up millions of sales
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Analyst - Financial services, Client data, LEI

£40000 - £50000 per annum + BONUS + BENEFITS: Harrington Starr: A leading, Cit...

Management Consultancy - Operational Research Analysts

£35000 - £50000 per annum + Bonus + Benefits: Pro-Recruitment Group: You must ...

Corporate Actions Consultant - Market data, ISO15022, presales

£45000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: Corporate Acti...

Prudential Risk/Operational Risk Associate - London

£350 - £400 per day: Harrington Starr: An opportunity has arisen at a FCA regu...

Day In a Page

Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics

Is sexual harassment a fact of gay life?

Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics
Kim Jong-un's haircut: The Independent heads to Ealing to try out the dictator's do

Our journalist tries out Kim Jong-un's haircut

The North Korean embassy in London complained when M&M Hair Academy used Kim Jong-un's image in the window. Curious, Guy Pewsey heads to the hair salon and surrenders to the clippers
A History of the First World War in 100 moments: A forgotten naval victory in which even Nature played a part

A History of the First World War in 100 moments

A forgotten naval victory in which even Nature played a part
Vespa rides on with launch of Primavera: Iconic Italian scooter still revving up millions of sales

Vespa rides on with launch of the Primavera

The Vespa has been a style icon since the 1950s and the release this month of its latest model confirms it has lost little of its lustre
Record Store Day: Independent music shops can offer a tempting alternative to downloads

Record Store Day celebrates independent music shops

This Saturday sees a host of events around the country to champion the sellers of well-grooved wax
10 best smartphones

10 best smartphones

With a number of new smartphones on the market, we round up the best around, including some more established models
Homelessness: Why is the supported lodgings lifeline under threat?

Why is the supported lodgings lifeline under threat?

Zubairi Sentongo swapped poverty in Uganda for homelessness in Britain. But a YMCA scheme connected him with a couple offering warmth and shelter
A History of the First World War in 100 Moments: When the world’s biggest shed took over Regent’s Park

A History of the First World War in 100 Moments

When the world’s biggest shed took over Regent’s Park
The pain of IVF

The pain of IVF

As an Italian woman vows to keep the babies from someone else’s eggs, Julian Baggini ponders how the reality of childbirth is often messier than the natural ideal
Supersize art

Is big better? Britain's latest super-sized art

The Kelpies are the latest addition to a growing army of giant sculptures. But naysayers are asking what a pair of gigantic horse heads tells us about Falkirk?
James Dean: Back on the big screen

James Dean: Back on the big screen

As 'Rebel without a Cause' is re-released, Geoffrey Macnab reveals how its star perfected his moody act
Catch-22: How the cult classic was adapted for the stage

How a cult classic was adapted for the stage

More than half a century after it was published 'Catch-22' will make its British stage debut next week