Auditing stands accused of failing to meet the needs of those who need it. Auditors are strictly correct when they say that they report only to the company's shareholders, and that the audit is only of the financial statements, not a complete health check of the business. But this fails to recognise the change in mood in recent years.
If audit is to be repositioned for the 1990s, it is necessary to understand the developments that have changed the auditing environment. Three in particular have had a profound effect.
Changing perceptions of corporate governance. The 1980s saw growing dissatisfaction with many aspects of the direction and control of companies. Some seemed to be run for their managers' benefit, with little regard for other stakeholders' interests. In the absence of a clear governance framework, auditors too often took the blame, their limited responsibilities not understood. At the same time, with privatisation beginning to affect many public-sector services, and others being restructured, questions of governance started to extend beyond the corporate sector.
Differing expectations of accountability. Whatever the law says, society now expects enterprises to take a broader view of the stakeholders to whom they are accountable, recognising the interests not just of shareholders but also of employees, customers and suppliers. Concurrently, there are pressures for fuller and more meaningful reporting. Enterprises are under pressure to account for their performance to all stakeholders in ways that meet their differing needs. It is highly desirable that audit should extend to these new forms of information and disclosure, rather than be confined to what could become an elitist set of formal financial statements.
More aggression in seeking recompense for actual or perceived losses. People who believe they have suffered loss are increasingly seeking to shift the burdens of blame and loss. Company failures have put auditors in the firing line. The impact on auditors is rising out of all proportion to the degree of culpability. None of us expects to get off scot-free when mistakes are made, but the public interest lies in a balance between fair penalties and encouragement to the professional to give his opinion in an independent and unconstrained way.
Auditors must adapt. The profession has a history of successful innovation, and there is also an opportunity today because of the Cadbury report and the new agenda it has created.
The effectiveness of Cadbury's proposed Code of Best Practice for corporate governance will be reviewed after two years. Auditors should use this period to revisit the fundamentals, to establish a vision for audit and reposition it successfully for the long term.
I do not claim to have all the answers. But to start the debate, I suggest a vision statement on the following lines:
'Audit will be regarded as a necessary support to the system of governance of corporate and other enterprises, providing independent assurance to stakeholders that they have received a proper account of those activities of the enterprise that are relevant to their particular interests.'
To take this vision forward, I propose a manifesto of five issues: stakeholders, scope, skills, standards and sanctions.
Stakeholders. While auditors cannot accept open-ended responsibility to allcomers, they must consider whether they shoud expand the class of stakeholders to whom they report. There is surely a role for auditors in areas such as company reports to employees, the local authority performance indicators required by the Citizens' Charter and environmental reports. These new reports will happen. There will be a demand for independent verification, and it makes sense for the auditing profession to be the providers.
Scope. Discussion of stakeholders leads to audit scope. Company auditors operate within the narrow statutory definition of an audit, but as long ago as 1985, in a speech to the Institute of Chartered Accountants in England and Wales, I noted that expectations were not being met and suggested that there were considerable opportunities to expand audit scope. The profession did not move forward. Now that Cadbury has made similar suggestions, a response is imperative. A change is needed, away from seeking to limit audit scope because of legitimate concerns about liability, towards a willingness to provide a wide scope of examination and report. This is a challenge, because it demands a more generalised concept of audit examination. But today it is no longer an option; it has become a necessity.
Skills. What skills are needed in the 1990s? Audit teams are already being strengthened with a broader range of skills. But rather than try to create a multi-skill capability in all individual chartered accountants, the aim should be to encourage multi-skill capability on a firm-wide basis.
However, this will put more onus on the team leaders to take a strategic view of the audit, particularly to handle the differing requirements of stakeholders. They will consequently have to be experts, not generalists. The role of the expert should be emphasised, perhaps by introducing a higher level of qualification earned through exams and experience.
Standards. Much has been written about independence, but the need is not so much for independence in the abstract as for lack of bias in opinions. Absolute independence is arguably impossible to achieve. Even if a company auditor were paid by someone else - perhaps the state - he would inevitably build a relationship with the people he audited, which could be seen as an impairment of independence. In addition, auditing has always had a business advisory side. Auditors have offered parallel services, particularly tax and general business counselling. This multi-disciplinary character is of real public interest and must be taken into account when looking at the independence issue.
Sanctions. Sanctions arise through regulation and the courts. On regulation, let me say that the desire to show the public that wrongdoers are being punished should not be at the expense of the individual in the dock. Today, when things go wrong, there is pressure for immediate reaction from regulators, with the result that issues are prejudged.
Turning to sanctions imposed through the courts, while I am enthusiastic about extending the scope of audit and about reporting to a wider group of stakeholders, there must be an integrated package, in which increased auditor responsibility is by a more rational approach to risk and liability. Reducing today's wholly inequitable burden of professional liability is crucial to taking forward the kind of developments I have outlined. There cannot be progress on scope without a deal on sanctions.
To conclude, Cadbury has given us a vital opportunity to re-establish the prestige of audit. The profession needs to work on a manifesto for reform based on the five issues I have outlined, which is responsive to the environment of the 1990s. We must not miss this opportunity to rise to the challenge. It may never come again.
Brandon Gough is the chairman of Coopers & Lybrand.
(Photograph omitted)Reuse content