Should Auditors Be Responsible For Catching Corporate Fraud?

Tensions are running high in the U.K. corporate auditing arena. Amid calls to break up the so-called Big Four auditors – PricewaterhouseCoopers, Deloitte, EY and KPMG – experts have raised concerns over why these players were unable to detect and prevent several high-profile corporate collapses and fraud schemes in recent years. Doubts over the Big Four‘s potential conflicts of interest in some cases have further fueled calls for a breakup.

“We are not confident in relying solely on the integrity of auditors to do the right thing in the face of conflicting interest,” concluded the U.K. Business, Energy and Industrial Strategy Committee in a report published earlier this year. “For the big firms, audits seem too often to be the route to milking the cash cow of consultancy business.”

At the same time, there is a growing campaign to expand the role of the corporate auditor, fueling the divide over how to boost the effectiveness of the auditing space while promoting competition and limiting conflicts of interest.

Earlier this year, David Dunckley, chief executive at auditing firm Grant Thornton, heard criticism from MPs in the House of Commons over why the firm failed to detect accounting fraud at cafe chain Patisserie Valerie, which fell into administration in January as a result of the scheme.

Dunckley raised some eyebrows when he noted that auditors “are not looking for fraud.”

“What is the point of audit in the first place?” rebutted one MP, according to the Financial Times in February.

Similar corporate failings – as seen with Carillion, BHS and, most recently, construction conglomerate Dawnus – are giving regulators, lawmakers and industry experts more cause for concern over the effectiveness of the auditing market.

Now, similar concerns are being raised in Australia. Accountancy group Chartered Accountants ANZ is calling on the government to expand the scope of the auditing sector in the country to allow auditors to be able to identify fraud and prevent company collapses.

Reports in Australian Financial Review on Wednesday (May 8) said the group receives funding from its Big Four consulting firm members – the same Big Four in the U.K.

Chartered Accountants ANZ surveyed 1,000 members of the Australian public and 1,000 in New Zealand. Nearly one-third said they would support lifting restrictions on auditors regarding the type of advisory services they can provide.

“The public wants auditors playing a bigger role, including helping to prevent corporate collapses, environmental, social and governance [audits], business strategy and tackling fraud,” concluded Amir Ghandar, the group’s reporting and assurance leader. “We believe technology is opening up new possibilities for what can be achieved in an audit, and that being clear on what audits are and aren’t covering is important.”

Not everyone is convinced that the public survey definitively showed support for expanding auditors’ roles, however. Further, some experts question the accountancy group’s motivation behind the survey.

“Why would they want to expand the scope of audits if the quality of that work has been criticized by the regulator here and in the U.K.?” asked Guy Underwood, a fraud investigator, in an interview with the Australian Financial Review. “That doesn’t make sense. What they should be doing is defining what an audit will and won’t do, and improving that first. That’s supported by the results of their own survey, which shows people don’t understand what is involved in an audit and the independence rules.”

The accountancy group’s survey also heightened the Australian market’s attention on the debate in the U.K. According to Ghandar, Chartered Accountants ANZ does not have an official stance on the U.K.’s exploration of breaking up the Big Four, but said that Australia and New Zealand should watch the market.

“I think we need to see how that plays out in the U.K. and even if it’s going to be implemented,” he said.