MDPs will face conflict of interest
19 July 1999
19 June 2014
25 November 2013
21 November 2013
9 October 2013
4 August 2014
Austin Mitchell MP questions whether multidisciplinary partnerships offer a dividend for stakeholders in accountability or pose a threat to independent auditing. Austin Mitchell is the Labour MP for Great Grimsby.
As long as the stock market boom continues, mergers will be all the rage. Everyone is looking for new niches to expand income and profits the easy way by swallowing other firms or finding new bedfellows.
Even accountants and lawyers are at it. Rather than fight turf wars they are to trade as multidisciplinary partnerships (MDPs).
The aim of MDPs is to expand profits rather than protect the public interest and examine companies.
Auditors have long used the cloak of professional services to sell consultancy and other services to clients. Having designed tax avoidance schemes, executive salary packages and advised on mergers and downsizing, the same accountants then perform "independent" audits.
This income dependency puts auditors and clients in a collusive relationship, where auditors do not want to report inconvenient facts.
Almost every week we hear some company's accounts were massaged, cooked and roasted while auditors played the three wise monkeys.
The legal and institutional structures hardly exert pressures on auditors to be independent. Following the 1990 Caparo judgment, auditors do not owe a duty of care to individual stakeholders. They are not independently regulated. They do not publish any worthwhile information about their affairs. And they now want protection from the consequences of their own failures via limited liability partnership.
Firms will be selling a wider variety of services once they form MDPs and their income dependency on audit clients will grow. None will have the backbone to question management or bite the hand that feeds.
With the same law and accountancy firms serving competing companies, MDPs will face huge conflicts of interest.
An MDP environment also creates pressures for changes to legal and institutional structures.
In an MDP world it makes no sense to have separate regulators for law and accountancy businesses so the Government will be under pressure to replace the present law and accountancy regulators with a single statute-based regulator.
Yet even this will not curb the desire of MDPs to sell other services to audit clients. No doubt the legal and accountancy professions will respond with a plethora of ethical guidelines, but the big accountancy firms have never been constrained by these in their pursuit of fees.
Stakeholders require credible and worthwhile information and a number of radical proposals will need to be considered.
If, contrary to Department of Trade and Industry reports, accountants and lawyers insist selling consultancy to audit clients does not impair their independence and that they can have effective Chinese walls between these services, there is no logic in denying banks, financial services companies, pension funds or trade unions and many others the ability to sell audits.
The Companies Act 1948 gave accountants a statutory monopoly of audits and in return accountants would deliver "independent" audits.
That bargain has never been honoured, so there is no reason to preserve the audit market for them. Other organisations willing to accept rigorous "independence" rules and create organisational structures solely concerned with the delivery of independent audits should be invited to enter the auditing market.
Other alternatives should be exploited. Customs & Excise, the Inland Revenue, the Health and Safety Executive and others also perform audits. In none does the client get to pick the auditor. None of these acts as consultant to the companies.
So which auditors do companies fear the most: the private sector poodles, or the public sector independent watchdogs? Why cannot a government agency or even the Inland Revenue conduct audits of major companies? It might make tax collection more efficient.
Lawyers and accountants may not like such suggestions. But if they rush into MDPs which do nothing for accountability they must be aware that advocates of competition will be looking at other ways to offset professional greed and that conflicts of interest will inevitably be thrown up.