Date: Thu, 21 Sep 2000 15:00:24 +0100 (GMT Daylight Time)
From: P N Sikka []
Subject: Testimony on auditor Independence
Sender: P N Sikka []
Reply-To: P N Sikka []
Message-ID: []

Dear Sir,

I am enclosing a number of papers which have a bearing on the topic of auditor independence. I note from your web site that the President of the Institute of Chartered Accountants of England & Wales, a representative of the UK and global auditing industry (partner in PwC) has given testimony to defend the economic interets of the industry. There is always the other side. I am unable (can't afford the cost) to fly to New York to give evidence but hope that the comments (and files attached here) will give the Commission some food for thought.

  1. This meassage is accompanied by a paper (Arnold and Sikka) on BCCI and raises questions about auditor independence. They were also raised by the inquiry conducted by Senators Kerry and Brown. To date, nothing has happened on the issues raised by the report. Hopefully, you will also look at the Sandstorm Report (held in the Congress Library, but considered to be a state secret in the UK - now extracts appear on which shows that PW advised (whilst acting as auditors) BCCI to move its treasury function from London, a development which had a considerable subsequent bearing on bringing BCCI to book.

    To this day there has been no UK independent investigation of the real/alleged audit failures at BCCI.

  2. Conflicts of interests are also responsible for the way auditors are implicated in moneylaundering activity. Our enclosed work (The Accountants' Laundromat) shows that accountancy firms are actively involved in facilitating moneylaundering.

  3. The conflicts of interest also affect the way accountancy firms deal with businesses in financial distress (may be different in the USA). Please see the enclosed paper titled "Insolvent Abuse ....".

  4. A 1976 UK government report on audit failures (co-authored by a partner from a major accountancy firms)at a company called Roadships noted that "Independence isessential to enable auditors to retain their objectivity which enables their work to be relied upon by outsiders. It may be estroyed in many ways but significantly in three; firstly, by auditors having a financial interest in the company; secondly, by the auditors being controlled in the broadest sense by the company; and thirdly, if the work which is being done is in fqact work which has been done previously by the auditors themselves acting as acocuntants" (para 243 of the 1976 report published by the Department of Trade and Industry on Roadships Limited). After examining the evidence, the inspectors concluded that "we do not accept that there can be the requisite degree of watchfulness where a man is checking his own figures or those a colleague ......... for these reasons we do not believe that [the auditors] ever achieved the standards of independence necessary for a wholly objective audit" paras 249 and 250 of the report).

  5. In another investigation commissioned by the UK's Department of Trade & Industy on audit failures at Burnholme & Forder (published in 1979), it was concluded that "in our view the principle of the auditor first compiling and reporting upon a profit forecast is not considered to be good practice for it may impair their ability to view the forecast objectively and must endanger the degree of independence essential to this work" (page 271 of the report).

  6. The UK government has failed to act upon any othese comments. In the late 1980s, Coopers & Lybrand acted as advisers and auditors for the Maxwell empire. they valued the company's assets (e.g. brands) and then issued an unqualified audit opinion on the same. Subsequently, Maxwell turned out to be a major fraud. Similar issues have been highlighted in frauds at Polly Peck, Levitt, Resort Hotels and others.

  7. I believe that financial auditors should not be permitted to use audits as a market-stall to sell other wares. This inevitably compromises auditor independence. The cost of this is picked by the public at large.

    In a society such as the USA, there are many kind of auditors - ranging from the IRS, Customs & Excise officers, hygiene inspectors, health and safety inspectors and so on. In none of these cases, are auditors hired or paid by the auditee. Neither can become an agent of the client. The same should apply to external company auditors. Which auditor does the public respect or fear? Financial auditors or other auditors?

  8. Company auditors enjoy a state guaranteed market of external audits. there are no state guaranteed markets for engineers, scientists, mathematicians and many other wealth creators, but accountants enjoy a statutory monopoly (e.g. external audit). This privilege should also be accompanied by public accountability requirements, regardless of auditor mode of trade (e.g. LLP, partnership etc.). Auditors should be required to publish meaningful information about their affairs. The UK's Limited Liability Partnership Act 2000 requires that firms trading as LLPs need to publish their accounts and other information.

    There should be the utmost transparency about any relationship between auditor (audit teams, audit firm and its associates, former partners subsequently being FDs at client companies) and company (including its present and former executives).

  9. Published research shows that when companies publish auditing and non-auditing services from two separate firms their acquire them at a lower cost compared to when both are acquired from a single source. This is so because audit firms are able to use audits as loss-leaders and then use that inside position to sell other services at a premium. So the economic arguments that somewho companies get a cheaper service if auditors sell everything do not hold up.

  10. The selling of non-audit services by audit firms to their audit clients also leads to unfair competition. Through the vehicle of an audit, auditors get easy access to company directors and make a pitch for their services. the same rout, or even information about it, is not available to any other business selling non-auditing services.

  11. It has become fashionable for accountancy firms to say that they have 'Chinese Walls' or that their provision of consultancy services to business does not impair their independence. If this argument is accepted then there is no logic whatsoever in reserving the audit market for accountants. The SEC should invite banks, pension funds, insurance companies, food supermarkets and everybody else to enter the audit market. There is no moral, economic or ethical reason for preserving the audit markets for accountants.

I have no objection whatsoever to this testimony and the accompanying papers being placed on the public record.

Prem Sikka
Professor of Accounting
University of Essex
Department of Accounting, Finance and Management
Wivenhoe Park
Essex CO4 3SQ, UK.
Tel No: +44+(0)1206 873773
Fax No: +44+(0)1206 873429