The role that auditors have should be expanded to close an expectation gap between public perception and what the industry actually does.
It would help prevent the large number of “small-scale, silent Carillions” that are likely to be happening every year, according to the authors of a new report.
Often there is a gap between what people think that audits should do, and what duties auditors perform.
Current rules mean there has been an “audit failure” when auditors do not discover fraud or misstatements, however the Institute for Public Policy Research (IPPR) argued that auditors should also be forced to report when companies are using aggressive accounting practices.
If aggressive accounting practices – which do not technically violate rules – are not highlighted in an audit, it should be considered an audit failure, the think tank said.
This could help close a gap between expectation and reality, it said.
IPPR is a progressive think tank which gets part of its funding from KPMG and Deloitte, both auditing giants.
KPMG gave Carillion a clean bill of health less than a year before the outsourcing giant collapsed in 2018, leaving massive debts and a big pension liability as well as costing thousands their jobs.
IPPR called on the Government to introduce a new system which challenges the “oligopoly” of the big four audit firms.
Between them, Deloitte, KPMG, PwC and EY represent 96% of the market.
It also said that a current Government consultation should expand the remit of auditors, shine a light on aggressive accounting, and end the close ties between the sector watchdog and the firms it regulates.
Auditing and non-auditing work should also be separated, the think tank said.
Many of the UK’s auditors work for companies who make most of their money in providing consulting services to businesses.
“Auditors should be the gatekeepers helping keep financial mismanagement at bay, yet too often they are failing to do so and are failing society. To meet society’s expectations and needs, there needs to be profound audit sector reform,” said IPPR senior economist Carsten Jung.
“A well-functioning audit sector should be expected to flag problematic accounting practices and risky business activities before they turn into damaging debacles. However, the current legal set-up does not require this from auditors.”
A spokesperson for the Department for Business, Energy and Industrial Strategy said: “The Government has already published proposals to strengthen our corporate governance and audit practices, helping to ensure that the UK remains a world leader in corporate transparency and advances its status as a place of the highest standards in audit.
“The proposals will break up dominance of ‘big four’ audit firms and require large businesses to be more transparent about their finances, helping to avoid company failures and safeguard British jobs for the future.”