“The Big Four’s domination of the large firm audit market in the UK is almost complete: in 2010 they audited 99 of the FTSE 100 largest listed firms, which change auditors every 48 years on average. It is clearly an oligopoly with all the attendant concerns about competition, choice, quality and conflict of interest. It gave no warning of the banking crisis.”

The UK’s House of Lords has delivered a damning indictment on the role of auditors and shareholders at the end of their 8 month investigation into the causes of the financial crisis. Auditors are accused of a “dereliction of duty” and investors criticised for their apathy: “Most shareholders appear to care little about a company’s choice of auditor.”

According to some of the shareholders who have been active in the HoL inquiry, the report itself  “offers an unusually rich and frank review of the issues on the audit market and role of auditors in the crisis”.  Although there is some disappointment that the report did not go as deeply into some areas as had been hoped (enhancing the audit report itself or defining the purpose of audit more clearly) the three main recommendations were warmly welcomed. In brief these are:

• A detailed investigation of the audit market by the Office of Fair Trading (OFT)
• Prudence to be reasserted as the guiding principle of accounting/audit; and
• Auditors to contribute more to transparency and stability, not least through formal two-way dialogue with supervisors.

Evidence given by Tim Bush, former Hermes fund manager and member of the Urgent Issues Task Force of the Accounting Standards Board was prominent throughout the report. Tim has been particularly concerned by the the conflict between IAS39 and the Companies Act 2006 which requires accounts to be prepared prudently. Tim is backed by accounting academic Professor Stella Fearnley who said that IAS “substituted neutrality for prudence”.  Iain Richards of Aviva Investors added weight to Tim’s concerns noting that “the True & Fair View has been characterised as being evidenced by compliance to the standards, particularly  by standard setters”.

UK shareholders mostly approve the board’s recommendation on the appointment of auditors at annual general meetings with little or no discussion. Lord Myners attributed this to endemic investor apathy noting that: “The average institutional investor has about as much interest in the companies in which it has invested its client’s funds, as somebody buying a betting ticket on a 2.30 horse at Plumpton. Passionately interested in what happens for the next three minutes, but not much interested in what happens to the horse thereafter.”

The Stewardship Code may yet nudge so-minded shreholders and the Code could be beefed up to cover audit issues according to suggestions put forward by Edward Davey MP, although the report strikes a somewhat gloomy note suggesting “It seems improbable that this apathy will soon be remedied…”