It is time to audit the Auditors

Wednesday, 25th April 2018 15:28 - by Ranjeet Singh

It’s difficult enough to make money in the stock market without being fed false information.

I mean, before you buy a share you probably look at the company’s balance sheet, the profit and loss account, research the directors on board, break down the business model, analyse the chart, look at the dividend flow and cover, research the market place, look at your bank account to see if you have enough money, speak to your wife to make sure she’s not going to leave you if it all goes horribly wrong and then finally, you pull the trigger – you ring up your broker and ask them to buy you £10,000 of company ABC.

That’s what happens, right?

Well how would you feel that all of the stuff that you were reading was false? What if the bank’s balance sheet or P&L account was not correct or the dividend flow was not covered as much as the numbers suggested? How would that make you feel?

And what if worse still it was specifically because of that information that you have now found to be false you bought those shares and that company has subsequently not just fallen in value but gone bust? Is the pain getting worse?

And what about if your wife now leaves you because she has had enough of you constantly picking losers in the stock market and she has decided to run off with Jim from next door who last year made the switch from trading equities to trading Bitcoin and had recently upgraded his car to a new Toyota Prius?

Whilst this sounds almost impossible to believe it did actually happen. In fact, it’s happening right now, it’s happening in every major city in the UK and somebody called Jim possibly at the end of your street is loving it.

What the hell am I going on about today, I hear you cry? Allow me to explain.

Just 2 weeks after the giant accountancy firm Price Waterhouse Coopers (PWC) audited the accounts of Carillion last year, Carillion announced a profits warning which caused a 40% collapse in its share price! How can that even be possible? How can a company as smart and resourceful as PWC possibly missed the fact that Carillion was going to be forced to make a profit warning of this nature?

It’s because unfortunately there is a massive conflict of interest. I don’t care what arguments may or may not be said about Chinese Walls or how they have procedures and policies in place to ensure that the audits are fair and independent.  I’m afraid that just doesn’t wash with me and neither should it with you.

Think of it like this. You are the head of a massive FTSE100 listed company and you need to get an audit, it’s a legal requirement and so you have to get it done. Who do you go to? Do you go to the company that you know is going to turn your book upside down and give you a damning report, or do you go to the more ‘friendly’ company that you know might turn a blind eye to one or two things and will be more likely to work with you; I think that we both know the answer to that one.

And of course, the ‘friendly’ auditor comes at a premium but that’s okay. The board knows that it’s worth paying a few more hundred thousand pounds for a glowing report.

However, when you have a small or medium sized business it’s very different. You don’t have the luxury of just pulling out a big wad of cash and then asking the auditors to bid for your business in terms of who can be the nicest to you. That’s a luxury that most people don’t have.

The truth is that this has gone on for too long and needs to stop. There are countless cases of this happening including British Home Stores for example where the auditors KPMG gave them a clean bill of health before the firm collapsed with a hole in its pension scheme of £1.3billion in April 2016!

You see this is what annoys me. It’s the small guy that loses again. The person who loses their pension whilst fat boy Phillip Green is out in the Mediterranean sunshine topping his tan on one of his yachts. It’s the retired teacher Bob who has decided that he wants to earn a bit of regular income and buys a few thousand pounds of “low risk FTSE250 dividend paying company”. As a result of the loss Bob and his elderly wife Margaret can’t go away to Tenerife like they normally do every year. In fact, they probably won’t be able to go to Tenerife for a few years because the loss on Carillion was so painful for them.

Did you know that out of all of the FTSE100 companies, 99 are of them are audited by the same 4 auditors which are PWC, KPMG, EY and Deloitte. So where’s the competition?

Grant Thornton which is the next largest auditor has recently announced that it’s no longer going to even try and compete with the top 4 companies because it’s a waste of their time. Grant Thornton was in fact the very company that audited my several years ago. They were super thorough and they weren’t interested in pleasantries. They did the job that they were supposed to and quite literally they turned the business upside down – and that’s okay. The whole point of an audit is to see what you are doing right, what you doing wrong, and then fix the things that you are doing wrong.

I didn’t try to serenade my auditor and tell them that I will take them to watch the cricket at Lords or that we should share a basket of strawberries at Wimbledon. And yet that is exactly goes on with the big auditors. The auditors don’t want to be too harsh because if they are then they know that they won’t win the contract next year and it will go to one of their competitors.

It’s a very ironic situation. If you think about it, the auditors that perform worst in their job (they do the least amount of credible auditing) get paid the most amount of money.

Call me cynical but I think that stinks.

Watch today’s short video at https://youtu.be/Wqynv1a1Dso

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.