We need higher accounting standards for big, listed firms

It’s really not supposed to be like this. In the old days accountants stayed well in the background and kept out of the news. Getting back to that state of affairs must be the fervent hope of the fine people who run PwC, one of the big four accounting firms that, much to its chagrin, is yet again back in the news.

Last week Britain’s Financial Reporting Council announced it was launching an investigation into PwC’s questionable audit of BT Italia, the Italian offspring of the British telecoms group.

The previous month PwC was fined for misconduct in the audit of Connaught, a FTSE 250 housing maintenance group. Meanwhile it has been forced to settle lawsuits in the US over the collapse of the futures broker MF Global and the mortgage lender Taylor, Beam & Whitaker. However, in terms of public perception this pales in comparison to the PwC bungle at this year’s Oscar’s when its senior staff handed over the wrong envelope for the Best Picture award.

Who still maintains that accountants are boring?

There used to be a fine old joke about Buffy Buffington going into his club on London’s Pall Mall and complaining to the steward about an unmoving man slumped over a pile of papers in the Reading Room.

Buffy fumes: “I say, it’s just too bad having members breathing their last on club premises.” To which the steward replies: “I am afraid you are mistaken, sir; I think you will find that the recumbent gentleman in question is in fact an accountant.” “Ah”, says Buffy, “that explains everything.”

Accountants may not take kindly to a joke of this kind but it’s also a fair bet that it is better to be considered boring than incompetent or worse.

As matters stand PwC is the most high-profile accounting firm to find itself in the eye of various auditing storms but it is not alone in either being charged or questioned over malpractice.

Unsurprisingly accountants think this is a tad unfair. Their job, they argue, is to work with the evidence as presented and where there is real malfeasance, say, by way of providing falsified records or, as in the case of BT Italia, where, among other things, fake contract renewals are alleged to have been made, accountants cannot be expected to act as policemen.

They may well have a point, but it’s an awkward point because there is a pretty thin line between making every effort to verify the accuracy of accounts and overlooking serious inconsistencies deliberately made or otherwise. Moreover it remains unclear how deep accountants are supposed to dig in their attempts to ensure that the material they are given is truly kosher.

In fact this auditing business is structurally weird. What happens is that companies furnish quite substantial sums of money to an allegedly independent and expert third party to verify their accounts. The word “allegedly” arises because many – if not most – companies have very long-standing relationships with accountancy firms and it is mutually beneficial for these relationships to be sustained. A good example of the strength of these ties is underlined by the fact that the organisation running the Oscars intends to keep working with PwC despite this year’s debacle.

Therefore, to talk of the accountancy companies as being “independent” in relation to their customers is questionable. Nonetheless accountants have professional standards they are obliged to maintain. They are also subject to external regulation.

My experience of audits is that they are complex affairs and in the case of a company like mine, which makes its money from a very large number of very small transactions, it takes a long time to verify the material once the audit is underway. Because of the complexity, errors routinely emerge and they are not necessarily the result of incompetence but the sheer pressure of work, which means that things get overlooked or confused.

None of this is even vaguely unlawful and everyone understands that a bit of give and take is required.

However, when it comes to large companies, especially listed companies whose shareholders are largely reliant on the published accounts to discover what’s happening to their investments, standards need to be higher.

Expectations of probity have risen. Well, they have risen in some jurisdictions more than others, and this is why accountancy firms are coming under an increasingly harsh spotlight.

Accountants are expected to get tough with their customers during audits. This is a pretty strange way of doing business because the norm of customer relations is to give the customer what he or she wants. So how to square the circle? Is it really the case that an accountancy firm carrying out a pretty aggressive audit will actually be invited back for another year?

Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster