Accountancy & Management: It ain't broke, so don't fix it: Roger Davis, Coopers & Lybrand's head of audit, says firms can best benefit clients by continuing to offer a range of advisory services

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The Independent Online
THE SPATE of high-profile corporate collapses and frauds has led to widespread cries that 'something must be done about auditing'. Typically, it is suggested that auditors be barred from providing non-audit services, or that there should be structural separation of the audit activities of practising firms, or even both.

Then, so the theory goes, auditors will be more independent of management, they will do a better audit and more company failures and frauds will be avoided.

It is a nice, simple theory. But its effect would be the opposite of the intended one.

The underlying causes of corporate collapses have little to do with auditing. They are not new. We see them in every recession - painful reminders that history's lessons have not been properly learnt.

They stem from poor management: dominant individuals, inadequately constructed boards and thus a discordant tone sent through the company, with poor controls as a result.

Also, in boom times, there is at best an absence of discouragement by City institutions and others to companies over-reaching themselves through rapid expansion, particularly in ill- considered acquisitions and using borrowed money.

It is the auditor who can play, and indeed is playing, a greater role in advising boards on the management of risk and addressing the above weaknesses. But he or she needs increasingly sophisticated skills to match the growing sophistication of company management and, regrettably, the fraudsters. Ready access to expertise in, for example, information technology, treasury management and financial structuring are all necessary for advising on risk.

If more of these skills had been applied in the past, some corporate failures might have been prevented, though the auditor can never compensate for a badly constructed board.

This is why the future of auditing lies in multi-disciplinary partnerships (MDPs) and why the ideology behind calls for audit independence runs against the grain of what is required.

Practising chartered accountants in the UK have long provided a range of business advice. Without doubt, this has helped to reduce the incidence of corporate failure. But increasingly that advice has required more specialism.

For example, many years ago it was a natural extension of the auditor's role to advise on management information systems. As the sophistication of business grew, this became a more specialist activity and so auditing firms formed management consultancy divisions, still largely composed of accountants. Then came computer technology, which required its own expertise. Hence the progressive evolution of MDPs.

These are valuable to commerce, industry and the public sector for three main reasons. First, business advisory services now tend to such issues as cost reduction, acquisition strategy and fraud prevention, which straddle many functions and so require a range of specialist skills. Second, most large assignments require industry expertise that can be obtained through the economies of scale of an MDP. Third, such practices are increasingly important to audits because, to be effective, audits require knowledge beyond the realms of accountancy - for example, in fraud prevention.

Perhaps even more important, though, is that MDPs make it easier to attract talented recruits to the auditing firm than would be possible with a narrowly based inspectorate of some kind. And in these cost-conscious times, they are more economical, since it is often cost-effective for the auditor to do non-audit work.

There is a wide range of consultancy and financial advice, from the general to the very specific, that auditors can provide. I do not believe anyone seriously thinks auditors should not submit the traditional management letter to the board of an audited company. But where do you draw the line between that and management consultancy?

The public perception of this problem is understandable. However, distinguishing between different types of work misses the point. It does not matter to the audit partner whether a pounds 100,000 fee is represented by 75 per cent audit or 75 per cent non-audit services; it is pounds 100,000. What matters is the threat to his or her own security if an audit client is lost. To counter it, auditing firms have rigorous internal reviews, now to be supplemented by automatic partner rotation. The prospect of sanction through regulatory discipline and lawsuits is a more powerful incentive than restrictions on what the auditor can do.

The answer to the risk of an auditor getting cosy with management is partner rotation, though my experience is that management these days tends to 'rotate' faster than the period advocated for the auditor.

In a recent Gallup survey by Coopers & Lybrand of the top 500 companies, more than 90 per cent said auditors should not be barred from providing non-audit services. But less than a quarter had bought management consultancy from their auditors in the past two years. So would a bar make much difference? It would be hard to attract talented consultants if you said that they could not tender to a large proportion of our big companies. And there are often good reasons - such as close knowledge of the problem to be solved - why the company would want its own auditor to advise.

Rather than threatening audit independence, all the services of an MDP are an independent challenge to management founded on the audit discipline. That is the reason people buy them. There is nothing broken and nothing to fix. Far from it. MDPs are a British success story. They are essential if auditing itself is best to serve the public interest.

(Photograph omitted)

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