The Reluctant Armchair Auditor

Sorting spending fact from fiction

Archive for the ‘accountancy profession’ Category

Greetings from the Planet Vulcan Earthlings

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Accountancy is a staid professional. I can see that. So any colourful intervention into the somewhat humdrum lives of finance professionals – even semi-retired ones like me – is always welcome.

I’ve just read this opinion piece from John Redwood reproduced on the Public Finance magazine’s website. Apparently all of my former colleagues busy cutting costs in the public sector are operating under some strange compulsion unwarranted by the different laws of financial physics that operate in deep space.

I was particularly struck by the following section of the post –

Whilst there are cuts in planned spending, total spending carries on rising in cash terms, so all the deficit reduction planned happens through increased tax revenues. The increases in VAT and National Insurance are an important part of delivering this tax-based approach. As we have seen, the main reason increased cash spending delivers some unpleasant cuts is the rising inflation. Bad public sector management in some councils and Quangos adds to the stresses.

Only a politician could have written the first two sentences. Or a practitioner of the old huckster’s art of misdirection: ‘Don’t look at these cuts, look over here at these tax rises.’

The only proper response to the next sentence is one I heard from a youngster on a bus recently: ‘Yeah, right.’

As for the last sentence. Well, there is already sufficient evidence from such well-known left-leaning journals like the Telegraph that cutting Quangos has nothing to do with deficit reduction either.

All of which leaves me with the ‘bad public sector management by some councils’ comment. Local government has consistently outperformed almost every other area of public services. Not only have services generally improved councils have also delivered year on year efficiencies. Real ones. The sort you can spend. A minimum 9% cut in local government funding is more than a bit of stress in the system and it definitely isn’t caused by poor management in any council however much government might wish it were.

Local government leaders have begun to wonder out loud what planet some politicians are living on. I think the answer is obvious isn’t it?

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Written by reluctantarmchairauditor

January 6, 2011 at 5:43 pm

The EU piles into the audit debate too

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In October the EU launched a little heralded consultation. Inside the audit profession it grabbed a lot of attention. If anything like the proposals it contains is implemented I would be staggered. It is a sign of the times though that some of them are even being mentioned by our friends in Brussels and Strasbourg.

Headlines from the paper dealing with the governance of audit firms include:

  • taking audit appointments out of the hands of the directors and shareholders giving it instead to an independent body;
  • requiring audit appointments to be time limited;
  • restricting the amount of non-audit work audit firms can undertake;
  • capping the amount of fees that an audit firm can earn from a single client;
  • asking national public sector audit organisations to audit the accounts of audit firms;
  • changing the ownership structures of audit firms; and,
  • beefing up the role of auditors of group accounts.

The EU is concerned that audit arrangements are not robust enough to help ensure we avoid future financial meltdowns like the one brought to us by the banking crisis.

These are ‘courageous’ proposals. That’s shorthand for ‘you must be joking’. I imagine that the accountancy big guns have lengthy submissions in the system that boil down to, ‘don’t do it’.

All of this is interesting to us armchair auditors because of the changes to the English audit arrangements for local public bodies. The abolition of the Audit Commission – which does the independent appointment of auditors envisaged by the EU – is meant to herald an era of councils appointing their own auditors.

So as EU policy heads in one direction England’s heads in another. Not something that worries our government too much I suspect. However, I can’t help but think that the sorts of issues that worry the EU are no different in character to ones that will come over the horizon if the changes in English audit arrangements are not properly thought through. Strangely enough some of the accountancy profession may agree with me on that.

Fingers crossed then.

Written by reluctantarmchairauditor

November 28, 2010 at 10:42 am

Going concern or concerned about going?

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Big wigs from the big accountancy firms appeared on 23 November before the House of Lords Economic Affairs Committee. It was not a meeting of minds.

Their Lordships wanted to know about how accountancy firms had dealt with the issue of ‘going concern’  in forming their opinions on the banks’  financial statements ahead of the recent crisis. This may seem like an esoteric accountancy issue but it isn’t. The banks’  business models gave rise to what were in their accounts and landed each of us taxpayers with a hefty bill.

For us pro- and semi-pro auditors their Lordships’ inquiry into the performance of auditors in the run up to the crisis and the concentration of power in the UK audit market is spectacularly interesting.

The auditing profession is regulated by the Financial Reporting Council (FRC) which had some interesting things to say in its submission to the House of Lords’ Inquiry. In essence it said too few auditors were involved in the audit of the UK’s largest companies and this was unhealthy for all sorts of reasons. It also said this,

 2.8 In considering behaviour and culture within the firms, the AIU [the FRC’s unit that audits the auditors on quality] has identified a number of instances of firms failing to apply sufficient professional scepticism in relation to key audit judgements. This lack of scepticism may manifest itself in a number of ways: over-reliance on management representations; failure to investigate conflicting explanations; failure to obtain appropriate third party confirmations; or seeking to obtain evidence that corroborates, rather than challenges, judgements made by client management.

Scepticism was at the heart of the questioning about ‘going concern’ by the Noble Lords. ‘Going concern’ is a cornerstone of financial reporting but all it means is that the business will continue trading for the forseeable future.  Directors should regularly assess if their business is a going concern and financial statements should be prepared on that basis. Unless of course the answer to the assessment is that the business isn’t a going concern.

 Accountancy Age reported what went on in the Lords’ Committee and it makes fascinating reading. Essentially any worries that auditors may have had about banks’  liquidity – a vital component of the idea of going concern – were allayed by conversations with government about the likelihood of support being available. The exchanges took me straight back to the FRC submission to the inquiry.

Why does any of this matter for us armchair auditors? I wrote before about the problems of reliable systems providing good data to support our work. I would also say that reliable robust audit opinions based on healthy scepticism – like I was taught as an audit nipper – on financial statements are a sine qua non.

Whether or not the changes in the shape of the audit market for the public sector in England will hep or hinder my profession in doing that work remains to be seen. What is clear is that armchair auditors, however good they may be, cannot do this work.

Written by reluctantarmchairauditor

November 26, 2010 at 5:56 pm