25 May 2012

John Stuttard… if I ruled the world

Why auditors should perform an ever greater role to help ensure the probity of companies today

In my 45 years in accountancy the role of auditor has been locked into a straightjacket. Political concerns about independence, box-ticking and procedural compliance have helped limit the wider role auditors once played – a role based on trust, integrity and objectivity.

Thankfully there has been a growing realisation that the statutory auditor has much to offer audit committees and board members. The auditor provides advice on subjects such as risk management and corporate governance, as well as mergers and acquisitions.
Yet when a financial problem arises, the hue and cry goes out – first towards the directors, then the auditors.

There is a huge gap in what is expected of the auditor and the accountant yet we have a golden opportunity to fill it, as well as a public duty. We are pretty good at analysing businesses, their risks and their systems. Yet somehow the statutory auditor has become trapped in opining on historical financial results. Indeed, this is a legal requirement. This was right in 1844 but we need to move on. We need to do more in fulfilling our purpose.

In boardrooms today the auditor is increasingly asked for views on corporate governance, strategic plans and managing risks. The auditor is a respected person with integrity, professionalism and independence of mind. When you look at corporate failures in recent years occasionally there is a scandal over misreporting. But failures normally stem from one or more of the following causes: poor corporate governance coupled with an autocratic or overzealous chief executive; a major acquisition with inadequate independent review of the strategic rationale, or at too high a price during a competitive auction, or after inadequate due diligence or with inadequate post-acquisition integration planning; and poor risk management associated with new areas of business or introducing new products – PPI mis-selling is one of the latest.

Corporate governance reviews have brought huge improvements to our UK Corporate Governance Code, surely now the best in the world. But it is a voluntary code and it has not prevented ongoing scandals, corporate failures and shareholder losses.

The auditor can perform an even greater role in helping to ensure the probity and stewardship of companies in the 21st century.

If I ruled the world, I would make this happen.