When US banking group Lehman Brothers collapsed in 2008, the ramifications were felt worldwide. But for the normally sedate accountancy profession, it represented a particularly violent jolt. As when energy group Enron went bust in 2001, auditors were thrust into the spotlight.
Enron’s auditor Arthur Andersen was unable to survive, but this time round there have been no high-profile casualties nor suggestions of improper behaviour. However, the profession has not escaped unscathed. The Accountancy and Actuarial Discipline Board (AADB) is looking into Ernst & Young’s (E&Y) role as Lehman’s auditor, and difficult questions have been asked about why auditors failed to flag potential problems at many of their clients.
All of which has made for a busy period for Vanessa Sharp, solicitor and general counsel at KPMG, one of the UK’s big four auditing firms (along with Deloitte, E&Y and PricewaterhouseCoopers). Previously, her main focus was on the ongoing merger between KPMG member firms, but since the crisis her workload has focused increasingly on regulation, both actual and proposed.
Two major reviews have been launched. One is being carried out by EU internal markets chief Michel Barnier, and is ongoing. The other was an investigation by the Audit Firm Governance Working Group, an independent panel set up by the Financial Reporting Council and the Institute of Chartered Accountants in England and Wales, and chaired by Norman Murray.
Murray’s study of the rules governing the profession led, in January this year, to the introduction of the Audit Firm Governance Code, designed to further protect shareholder interests. It is applicable to firms that audit more than 20 listed companies.
As a result, in December 2010 Sharp found herself at KPMG’s first meeting of its newly created oversight body, known internally as the public interest committee (PIC). The firm has hired three non-executive directors to sit on it: Sir Steve Robson, a retired Treasury civil servant; Tom de Swann, the former finance director of Dutch bank ABN Amro; and German economics stalwart Alfred Tacke. The PIC is responsible for KPMG Europe, hence its international mix of non-executives.
Sharp concedes the board is small, especially in comparison to the firm’s 28-strong main board. But she adds: “The PIC is part of the governance structure of the firm; it has a specific focus and with a much larger board it would be difficult to manage that.” At the time of writing, however, a fourth member was being recruited.
Sharp says her top priority is to educate the non-executives about KPMG – which employs more than 140,000 people in 140 countries – and the wider industry, as all are experts in their own fields but not in auditing. She expects to continue working closely with the board well into 2011.
“It’s early days and it’s going to be interesting as the committee finds its feet, but it’s already making a contribution,” she says.
The Barnier investigation could have far wider implications. The EU chief published a green paper in October – Audit Policy: Lessons from the Crisis – outlining a radical overhaul of the way auditors are regulated, and has gone on record stating that “the status quo is not an option”. He is proposing radical reform of the industry, including a pan-European regulator and moves to break the big four’s dominance.
“The main thing on the horizon is Barnier and it’s unclear what [the] conclusions will be,” Sharp concedes. “There will almost certainly be some changes for the profession to grapple with.”
The green paper’s publication opened a two-month consultation period and Sharp worked on KPMG’s submission, which drew on contributions from the global network and especially senior managers in the audit department. It was signed off by John Griffith-Jones, chairman of KPMG’s Europe, Middle East and Asia region, who welcomed the EU interest but argued against the need for radical reform.
In his covering letter at the time he noted: “We do not agree with regulatory intervention to artificially change the market by distorting the ’level playing field’, particularly where this restricts the rights of audit committees in their choice of audit firm. The 8th Directive rightly places the appointment of the auditor in the hands of the owners of the company to whom the auditor reports.”
The 8th Council Directive on Company Law was first introduced in 1984 but its scope was broadened in 2005 following a rash of accountancy scandals.
The letter continues: “Moreover, we do not believe that there is evidence that auditors are not independent at present nor that audit quality is adversely affected by factors such as longevity of an audit engagement, the level of fees paid […] or the nature of the services permissible.”
While Sharp acknowledges that Barnier will continue to take up much of her time this year, she also believes that many concerns have been blown out of proportion.
“While I don’t want to sound like we’re sitting in an ivory tower, on the whole auditors did what was asked of them,” she says. “There may be a perception that there needs to be change but we don’t want to throw the baby out with the bathwater.”
She is also dismissive of a potential big four failure curtailing the auditor market. “For most clients, any concerns [about] choice come some way behind the need for good audit work,” she says.
She accepts, however, that after the crisis regulators are making their presence felt and the firm has had to react to that. “We’re at the forefront of being asked for information – and of making sure clients understand [why] regulators [are involved] in their business,” she concludes.