David Prosser: Audit report is another indictment of investors


Outlook The report into the audit market by the House of Lords Economic Affairs Committee is long on diagnosis of the problems in the sector, but short on potential remedies. It essentially offers three ideas for encouraging competition, but then sets out some fundamental drawbacks with two of the options.

So, while the Lords suggest that compulsory retendering of audit contracts on a regular basis might force firms to work harder to ensure high standards, they also accept there isn't much point if the result is simply that the "big four" rotate clients between each other. Similarly, it suggests there is a case for joint auditing, with companies required to appoint two auditors, including one non-big four firm, only to point out how bureaucratic and unsatisfactory this system has proved in France.

That leaves the committee's third suggestion: much greater shareholder involvement in the appointment of auditors. To which one might reply, why are shareholders not already involved?

There is something odd about the idea that the owners of a company need to be coerced into properly examining the decisions made by the managers working for them. Sadly, we know this is the case: with one or two honourable exceptions, large institutional shareholders have a hopeless track record of holding companies to account. This is why Sir David Walker was asked to conduct a review ofcorporate governance standards in the aftermath of the financial crisis – some of his recommendations are now being incorporated into the Combined Code.

Would standards improve if companies had to press a handful of their most active shareholders into serving on a committee responsible for auditor appointments and reviews? It's worth a try. For standards need improving – where were the auditors when the banks crashed the economy?

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