After a string of embarrassing failures, the Big Four accounting firms are turning to the thesaurus for help.
In describing the companies they audit, the word “client” is out of favour and auditors are looking for alternatives that may be clunkier but vaunt their independence.
KPMG — which has received the harshest criticism over the quality of its audits over the past 18 months — is the first of the Big Four to have introduced a formal policy that requires staff to refer to the companies it audits as an “audited company” or “audited entity”.
The policy was introduced by KPMG’s UK chairman Bill Michael last November in an attempt to reinforce the notion that the firm’s ultimate clients are the shareholders of the companies it audits, rather than company directors.
PwC, EY and Deloitte said they did not have formal policies in place on how to describe the companies they audit. However, PwC and Deloitte said they have informally encouraged their auditors to stop referring to the companies they audit as “clients” over the past two years.
Deloitte additionally sends formal guidance to audit staff reminding them that the firm’s responsibilities are to the shareholders of the organisations they audit.
“We recognise the distinction emphasised by referring to ‘audited entities’ and are supportive of that. However, it’s the overall culture and mindset that is important, not just the wording, and that is where we as a firm continue to be focused,” a Deloitte spokesperson said.
Michael Izza, head of the UK’s largest accounting body, the ICAEW, told MPs in January that moving away from viewing companies as clients would help improve audit quality.
His comments were made before the House of Commons’ business, energy and industrial strategy committee, which is scrutinising the future of the audit profession following a series of high profile accounting controversies at companies including BHS, Carillion and Patisserie Valerie. All three of these scandals raised questions about whether the auditor was too close to the client to spot wrongdoing.
Mr Izza told MPs: “A small point but one that I think goes to the heart of culture is that within the firms, the [companies] they audit are referred to as ‘audit clients’. They are not the client; the client is the investor…So instead of calling them audit clients, why do we not call them ‘the firms that they audit’?”
A senior audit partner at EY said he supported the shift away from calling audited entities “clients”, although the firm does not have a formal policy in place. A spokesperson for EY said it would “consider” the ICAEW’s recommendations.
Some accounting experts were sceptical as to whether this would bring about real behavioural change.
Karthik Ramanna, professor at Oxford university’s Blavatnik School of Government, said dropping the term “looks like window dressing”. “It’s clever PR that deflects from the real issue — the insidious effect of consulting profits on audit integrity,” he said.
