Putting auditors under the microscope

One of the possible positive outcomes of the global financial crisis and the insane running from pillar to post by regulators and governments is that key professional services may be re-defined - preferably legally, but certainly in the popular mind.

For, until we clean up the muck left behind in the Augean stables, there is a real risk that sometime in the future, may be years or even decades ahead, we will repeat the same mistakes.

For it is mind-boggling that almost the entire western banking sector, headed by some of the finest graduates from our best business schools, could have walked blinkered in to the toxic cesspit that is the sub-prime crisis.

Further, having got themselves up to their necks in the swill, these rather refined, highly financially skilled men - and they are usually men - then opted for the nuclear button and decided to pull down the entire temple of capitalism with them.

It is tempting to say this is a failure of the business school ethos and a victory for the on-the-job, top-down style of management, but I shall resist.

Even so, one professional group in the eye of the storm is that of auditing - not the internal number crunchers, but the real McCoy, external consultants.

The reason why governments must turn their eyes on auditors is quite clear: since the beginning of the 2000s, with the scandals of Enron, Worldcom et al, the one thing that has become obviously clear is that accountants and auditors should have been paying closer attention to the claims of chief financial officers, audit committees and internal auditors about the performance of some of the leading banks.

The theory is simple, at least in the UK. Auditors have an obligation on behalf of shareholders, even if this is surrounded with the mis-leading caveat that its statement of limited assurance is not a blanket endorsement of the financial statement.

Equally, their statements of 'reasonable assurance' do not inspire any confidence at all, since it is basically a halfway house between saying that a financial statement looks as if it is genuine and that there is something dodgy about the numbers. This is even more so when it comes to the claims of materiality.

Like the boy who disliked blame, audits in the UK are targeted at material fraud - but not all frauds as is the practice in the US, as those of us reading the daily behaviour of many of the leading global financial organisations know so well.

At an historic time like this, the words of comfort that we will all welcome from auditors are the very ones that they cannot give us, mainly because of the profession's own internal contradictions.

Auditing is generally done on the principle that the business is a going concern, a legal responsibility which is principally that of the directors.