Date: Thu, 21 Sep 2000 15:00:24 +0100 (GMT Daylight Time)
From: P N Sikka [firstname.lastname@example.org]
Subject: Testimony on auditor Independence
Sender: P N Sikka [email@example.com]
Reply-To: P N Sikka [firstname.lastname@example.org]
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.
- 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
http://visar.csustan.edu/aaba/aaba.htm) 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.
- 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.
- 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 ....".
- 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
- 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).
- 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.
- 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?
- 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).
- 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.
- 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.
- 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.
Professor of Accounting
University of Essex
Department of Accounting, Finance and Management
Essex CO4 3SQ, UK.
Tel No: +44+(0)1206 873773
Fax No: +44+(0)1206 873429