Audit reform: Syed Kamall

Syed Kamall says he is determined to have a full and frank debate on the revision of Europe’s complex auditing rules.

The financial crisis has laid bare the multiple failings in the governance of the financial services sector. Correcting it requires careful and methodical analysis of the complex interplay of forces that led to the near total collapse of the system in 2008.

Set against this background, the European commission’s proposal on amending the existing directive on audit and introducing a new regulation for the audit of public interest entities seems understandable. The blow up of Lehman Brothers and the numerous examples of failing financial institutions beg the question: why did no one spot these huge anomalies on bank balance sheets? In particular, how is it that those responsible for making sure a company is a going concern, the auditors, did not notice what was going on?

We need to question the way companies are audited, and we need to ask the right questions from a clear understanding of what work auditors are expected to perform. There was a widespread failure to spot the build up of problems, which has happened many times before with non-financial companies failing, despite having their balance sheets checked only months before.

The auditor’s job is to assess whether a company’s accounts are a true and accurate reflection of what transactions have taken place and the state of the company’s finances at a recent date. They are an historical record: an audit is the wrong tool for predicting the future. Auditors can identify anomalies and areas for concern on a company’s balance sheet but they are not responsible for the future financial management of a company, and they rely on company managements to open up their books. Good corporate governance and adopting appropriate accounting rules are vital to identify dangers ahead. Lehman Brothers played the system by using two different sets of accounting rules.

Naturally, there are ways we can improve the relationship between the company and the auditor. We need to make sure that the supervisor, the auditor and company are constantly in dialogue to ensure any perceived risks are flagged up as early as possible. This in turn means that audit committees must do their jobs properly and hold the board to account. It also means that audit reports need to be visible, transparent and trustworthy. This all relates to audit quality. But what about competition? My starting point is that if market concentration is an issue, it should be competition authorities who deal with it. The fact that the competition directorate flagged through several audit mergers in the past few years would suggest that the issue is not clear cut.

Overall I want to have an open and transparent discussion with my colleagues. No option is off the table at this point and I want to make sure that the debate remains reasoned and based on evidence. I would like to hear especially from audit clients and investors, not just from auditors themselves. We will have a full and frank debate and I firmly believe that the final outcome of this report can improve confidence in the auditing process.

Syed Kamall is a member of parliament's legal affairs committee and rapporteur on the revision of statutory audits of annual accounts and consolidated accounts and on the statutory audit of public interests