June 24, 2024

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A prescription to curb corporate failures

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“Professional judgment is a critical feature of any audit,” according to the UK watchdog, the Financial Reporting Council, which in 2022 urged auditors to sharpen their scepticism. An independent mindset is particularly important when it comes to assessing whether a business is a “going concern”. Alongside internal controls and the potential for fraud, deciding whether a company risks going bankrupt is a critical focus for auditors. It is here, according to new research, that UK firms are falling short.

The Audit Reform Lab (ARL), a think-tank, says auditors failed to sound the alarm before 75 per cent of big UK corporate collapses between 2010 and 2022. While auditor performance is poor, partner pay is high — and rising — and regulation is ineffective, it points out.

It is understandable that auditors sometimes hesitate to pull the trigger on going concern warnings. Assessing future threats to a business is hard, as the unforeseen impact of pandemic and war has shown in recent years. Fraud — another area where auditors could be more alert — sometimes undermines their attempts to root out the truth. Conflicts of interest with more lucrative non-audit opportunities are a potential distraction for big firms.

Warnings can deter suppliers and customers from shipping goods or paying bills and tip the company into a self-fulfilling crisis of cash and confidence. By including a “material uncertainty” paragraph in published accounts — or suggesting they are considering such a clause — accountants therefore put themselves on a collision course with their clients’ management and board.

No wonder some critics believe auditors should confine themselves to certifying that accounts are true and fair and leave it to other stakeholders to draw their own conclusions about the likely impact of risks ahead.

As ARL rightly points out,…

2024-05-27 07:00:46

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