United Kingdom

Botched audits costing Britain billions of pounds, economist warns 

Accountancy firms are costing workers, suppliers and the economy billions of pounds, says economist Carsten Jung

Auditors are 'failing society' through their inability to prevent corporate collapses, a former Bank of England economist has warned.

Accountancy firms are costing workers, suppliers and the economy billions of pounds, according to a report by Carsten Jung, senior economist at the Institute for Public Policy Research (IPPR) think tank.

Jung, who worked for the Bank for six years, accused auditors of enabling 'boom and bust' cycles which enrich bosses by allowing them to present an overly optimistic version of their firm's finances before weak foundations eventually lead to collapse.

The report warned that 'a large number of small-scale Carillions are likely happening every year', a reference to the construction firm which imploded in 2018 amid criticism that auditors had failed to spot the weakness of its finances. 

The IPPR has called on the Government to expand auditors' remit so they also have to examine their clients' governance, climate risks and use of personal data.

Accountancy firms should also make it clear to investors and customers if a business's finances lack transparency, the IPPR added.

And they must introduce a culture of challenge to their work, separating audit arms from other consultancy activities to avoid conflicts of interest.

The IPPR said this should help to break up the 'oligopoly' of the Big Four auditors – Deloitte, KPMG, PwC and EY.

Jung said: '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.

'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.'

The IPPR's recommendations echo those made by Sir Donald Brydon and Sir John Kingman, both of whom have completed reviews into the sector in the wake of high-profile collapses such as BHS and Patisserie Valerie. 

The Government is consulting on audit reform.

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