Audit waffle that smothers small business
Sunday, 23 March 2008
Luke Johnson
Early this month I sat in an audit committee meeting of a smallish listed company. I was intrigued to hear both the finance director and audit partner declare that the accountancy profession had "lost the plot". Or rather, the mandarins who decide on accounting standards had.
The company had just been through the agonies of adopting international financial reporting standards (IFRS), which means the notes to this year's accounts cover almost 60 pages. The finance director described the process of preparing the 2007 audit as a "world of pain". This way lies madness - for a smaller company at least.
Who on earth is really going to read all this arcane waffle? One online provider of annual reports has analysed the parts of the documents those who access its site look at. More than 90 per cent of users studied only the section covering directors' remuneration. All they want to know is how much the bosses get paid. Everything else was ignored.
In truth, so much of a modern set of company accounts is rote verbiage that the detail obscures the salient facts. In spite of all the extra work, fees and logical reasoning, I fear accounts have gone backwards over the past 15 years in terms of their transparency and usefulness.
I do not pretend accounts were always perfect in the past. A company I knew well in the 1980s once published a pre-tax profit of £17m. What was not openly disclosed was that this figure was derived from provision releases (accruals set up to cover expected future expenses) of £20m. The company concerned ended up in the knacker's yard. Following the sad demise of Arthur Andersen in the wake of the Enron scandal, auditors have been more thorough and less "flexible" over accounting policies. This sort of increased rigour is a good thing.
However, the slightly barmy urge to be ultra-scientific leads to obscurantism. At the aforementioned audit meeting, I had to spend 15 minutes hearing the difference between intangible assets and goodwill, and the very distinct treatments under the rules: a perfect example of the professional tendency towards opacity and technicalities. Such minutiae allow those with certain letters after their names to keep us mere mortals in our place.
Meanwhile, the global banking industry has lost at least $400bn in nine months, and none of their auditors saw anything amiss. They were too busy on the detail to comment on the big picture.
At Channel 4, the UK broadcaster, we have in effect three auditors: KPMG for the Corporation, Deloitte for regulator Ofcom, and Grant Thornton "Delivering Business Assurance". These great firms do outstanding work for us, but I sometimes wonder how the finance department has time for anything apart from audits.
The actuaries are worse. They specialise in dark calculations that throw up scary obligations decades hence for pension funds. The liabilities potentially owing in 40 years can swing by 20 per cent or more depending on this month's gilt yields. I suspect that fewer than one in 100 pension fund trustees even begin to comprehend how actuaries produce their numbers. Surely there must be a more rational and stable way of measuring such very long-term commitments?
The regulator of both actuaries and accountants in the UK is the Financial Reporting Council. It claims it "facilitates entrepreneurial success", and makes accounts "relevant, reliable and understandable". You could have fooled me. They argue that decent standards of corporate reporting and governance increase trust in companies and advisers.
That may be true, but accounts are principally there to help shareholders and pensioners understand what is happening to their capital.
There should be simpler standards for smaller companies. You get an overwhelming impression that the good and the great who run the FRC have all worked in large organisations that have the resources to deal with the bureaucracy. And, of course, the professions like an excuse to charge more and complicate matters.
But does any of this really help managers run their companies better? Is all the cost and distraction worthwhile? I think we are in slight danger of auditing business to death.
...........................................
The writer is chairman of Channel 4 and runs Risk Capital Partners, a private equity firm
— FT Syndication Service
Early this month I sat in an audit committee meeting of a smallish listed company. I was intrigued to hear both the finance director and audit partner declare that the accountancy profession had "lost the plot". Or rather, the mandarins who decide on accounting standards had.
The company had just been through the agonies of adopting international financial reporting standards (IFRS), which means the notes to this year's accounts cover almost 60 pages. The finance director described the process of preparing the 2007 audit as a "world of pain". This way lies madness - for a smaller company at least.
Who on earth is really going to read all this arcane waffle? One online provider of annual reports has analysed the parts of the documents those who access its site look at. More than 90 per cent of users studied only the section covering directors' remuneration. All they want to know is how much the bosses get paid. Everything else was ignored.
In truth, so much of a modern set of company accounts is rote verbiage that the detail obscures the salient facts. In spite of all the extra work, fees and logical reasoning, I fear accounts have gone backwards over the past 15 years in terms of their transparency and usefulness.
I do not pretend accounts were always perfect in the past. A company I knew well in the 1980s once published a pre-tax profit of £17m. What was not openly disclosed was that this figure was derived from provision releases (accruals set up to cover expected future expenses) of £20m. The company concerned ended up in the knacker's yard. Following the sad demise of Arthur Andersen in the wake of the Enron scandal, auditors have been more thorough and less "flexible" over accounting policies. This sort of increased rigour is a good thing.
However, the slightly barmy urge to be ultra-scientific leads to obscurantism. At the aforementioned audit meeting, I had to spend 15 minutes hearing the difference between intangible assets and goodwill, and the very distinct treatments under the rules: a perfect example of the professional tendency towards opacity and technicalities. Such minutiae allow those with certain letters after their names to keep us mere mortals in our place.
Meanwhile, the global banking industry has lost at least $400bn in nine months, and none of their auditors saw anything amiss. They were too busy on the detail to comment on the big picture.
At Channel 4, the UK broadcaster, we have in effect three auditors: KPMG for the Corporation, Deloitte for regulator Ofcom, and Grant Thornton "Delivering Business Assurance". These great firms do outstanding work for us, but I sometimes wonder how the finance department has time for anything apart from audits.
The actuaries are worse. They specialise in dark calculations that throw up scary obligations decades hence for pension funds. The liabilities potentially owing in 40 years can swing by 20 per cent or more depending on this month's gilt yields. I suspect that fewer than one in 100 pension fund trustees even begin to comprehend how actuaries produce their numbers. Surely there must be a more rational and stable way of measuring such very long-term commitments?
The regulator of both actuaries and accountants in the UK is the Financial Reporting Council. It claims it "facilitates entrepreneurial success", and makes accounts "relevant, reliable and understandable". You could have fooled me. They argue that decent standards of corporate reporting and governance increase trust in companies and advisers.
That may be true, but accounts are principally there to help shareholders and pensioners understand what is happening to their capital.
There should be simpler standards for smaller companies. You get an overwhelming impression that the good and the great who run the FRC have all worked in large organisations that have the resources to deal with the bureaucracy. And, of course, the professions like an excuse to charge more and complicate matters.
But does any of this really help managers run their companies better? Is all the cost and distraction worthwhile? I think we are in slight danger of auditing business to death.
...........................................
The writer is chairman of Channel 4 and runs Risk Capital Partners, a private equity firm
— FT Syndication Service