A new report from the International Forum of Independent Audit Regulators shows that global accounting watchdogs identified serious problems at 40 per cent of the audits they inspected last year involving companies in “riskier” situations, such as M&A deals. These included conflicts that compromised objectivity, and widespread failures to test the accuracy and reasonableness of companies’ data and assumptions.
“If you have a market and 40 percent of the goods that are sampled are defective in some way, that is a market that is not functioning very well,” says Karthik Ramanna, professor of business and public policy at Oxford’s Blavatnik School of Government.
Of course, the market for audit services is not quite the same as that for used cars. For one thing, customers are obliged to buy the product — all companies above a certain size must be audited. The second difference is that the “purchaser” (in terms of who chooses) is not the end consumer, such as those creditors, counterparties and others who might take a dispassionate economic decision based on the contents of accounts. Instead it is an intermediary.
An audit is supposed to be a snapshot of a company. Instead, as the accountancy theorist Shyam Sunder observes, the interaction is more like that between a fashion photographer and a model. “The photographer records not simply the appearance of the model as it is in fact, but actively engages with the model to produce images that serve the purposes of both,” he wrote.