Choose your auditor wisely

About a week ago Eric Pickles announced his proposals for the audit regime for public bodies that would replace the current regime once the Audit Commission has been abolished. Public organizations with a turnover of at least £6.5million would be free to select their own external auditor in the same way that private companies do. As with all the local freedom announced by this government I don't doubt that there will be constraints but the proposals, so far, do not go into the details of the codes of practice or guidelines that would accompany this new freedom. Nevertheless, I have a couple of general observations to make.

Firstly, last week I read a newspaper snippet about a House of Lords report which claimed that the complacency of auditors contributed to the current financial crisis. The newspaper report mentioned that on average the FTSE100 companies change their auditors every 48 years. Given that some of the companies change of auditor would have been because Arthur Anderson collapsed after the Enron scandal one begins to wonder how often a large company changes its auditor when it does not have to. This kind of thing would be good news for the audit firms pitching for business from councils and hospitals because once they are appointed they might expect to receive fees for generations. I appreciate the government might include a requirement in the code of practice, or whatever, that means an audit firm has to be changed every 5 or 7 years but it seems to me unlikely since no such requirement is included in company legislation.

My second comment is to point out that the European Commission is heading in the opposite direction. Last year it published a consultation paper Audit Policy: Lessons from the Crisis where it said it was ‘considering the feasibility of a scenario where the audit role is one of statutory inspection wherein the appointment, remuneration and duration of the engagement would be the responsibility of a third party, perhaps a regulator, rather than the company itself.’