It is the job of auditors to flag potential solvency risks but, against a backdrop of high profile collapses at Carillion, Thomas Cook and other firms, auditors appear to be failing to do this.
Professor Adam Leaver, Director of the Audit Reform Lab, said, “Auditors are failing in their basic duty to warn shareholders and other stakeholders that their firms could go bust. Our findings show that only 1 in 4 large company collapses in our dataset receive a going concern warning by auditors in their final year accounts. These audit failures have not stopped partner pay from rising - average pay for partners at the Big Four firms reached £872,500. There is 'reward for failure' in the audit industry and it is high time for root and branch reform."
Professor Fraser McLeay, Dean at Sheffield University Management School, stated that, “Research such as that conducted by Professor Leaver and the Audit Reform Lab is reflective of the School’s focus on socially responsible management practices. The report is already generating significant interest and impact, with recent coverage in the FT and The Times.”
Within the report, The Audit Reform Lab makes a number of recommendations:
- A new regulator, with enhanced enforcement and sanction powers, lines of accountability to parliament and funded by a statutory, rather than voluntary, levy.
- A new mission for audit, provided by the new regulator to reinforce principles of independent judgement and professional scepticism in audit.
- A reformed culture within the audit industry, reinforced by legal separation of audit and non-audit services and new auditor-specific qualifications, skills, and training; with greater coordination between the professional body and universities to create accredited educational pathways.
- Greater partner accountability for audit failure via a reformed sanction regime that targets partner incomes.