Who audits your auditors?
For some of my former Barclays colleagues of a certain age, a picture of a green biro is the stuff of nightmares. From the times when huge amounts of bank records were still paper based (a long while ago but more recently than you might think) a green biro was used to show that those records had been checked by Internal Audit; the Inspectors as they had known then. There were also some less kind terms used.
To go through an audit can still be a stressful experience for some, whether internal using the organisation’s own department, or external.
Yet the auditors now find themselves under pressure. Over the last 10 years a series of business failures – Patisserie Valerie, BHS, Wirecadrd, Carillion – have questioned how well auditors have been doing their job, or whether the stakeholders who rely on their work are expecting too much.
The Carillion situation is especially important right now, as its auditors, KPMG, find themselves at a hearing of their regulator, the Financial Reporting Council. One of their staff has already admitted some kind of wrongdoing or shortcoming, and also has been fined and banned from audit work after misleading the regulator over another audit – of another firm, Regeneris. Others in KPMG are accused of falsifying documents.
This morning we have news of a fine for KPMG – again – for audits failings for the collapsed retailer Conviviality.
This evidence of shortcomings is unfortunate, coming as it does when the focus on company accounts may be changing. The recent article on accounting for Carbon Emissions shows how financial accounting is not the limit of what modern organisations must aim at. This article is suggesting an approach – it has yet to be adopted – but including environmental liabilities may become a part of annual reports in the future.
Where does the buck stop? In the UK seemingly it goes to the new head of the FRC, Jan Du Plessis, a former CEO of BT. Hugely experienced, even if his time at BT coincides with it being described as a pension fund with a phone company attached, and its pension fund arrangements being questioned again in the most recent edition of Private Eye Magazine.
Trust and verify was the term adopted when making progress with reducing the number of nuclear weapons. It remains a reasonable approach to more routine business dealings, including when you are looking at a set of financial reports. The problem for external stakeholders is that with large complex organisations – Wirecard, Carillion – verification is not easy.
I recall a finance training session in late 2017 which included someone from a then Carillion supplier. They were initially surprised at my analysis of the situation – by then I could see the end for Carillion. That one was relatively easy to identify, yet many were caught out.
Sometimes we cannot just rely on the audit: we may need to trust and verify ourselves.
https://www.ft.com/content/c41f13e9-79cc-4779-bd91-9e77f966f940 on KPMG fine for audit failings at Conviviality
https://www.frc.org.uk/news/december-2021-(1)/jan-du-plessis-named-as-business-secretary%E2%80%99s-candi the FRC’s new chief – Jan du Plessis
Buzzword of the Week – Total Return
Definition – the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends, and distributions received over a period. Total return has two broad categories: income including interest paid by fixed-income investments, distributions, or dividends – and capital appreciation, representing the change in the market price of an asset.
Alternate View – Remember to confine this term to investment: in business use it remains far too vague. As an investor the key element will be not just what the return is, but over what period, against which benchmark, and crucially – for what risk (and if using advisers, at what cost)?