More than just making up numbers

7 August 2002
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08 August 2002

The auditing crises that have hit confidence in the US have prompted the British government to propose wide-ranging reforms. David Arminas explores the opportunities for purchasers

The past year has been one of the roughest for auditors, particularly in the United States, with their connection to the collapse of energy trader Enron.

At the centre of the bankruptcies and financial controversy has been auditor performance - the smoke and mirrors surrounding not only their appointment, usually done behind closed doors, but also their performance.

Concerns in America over auditor performance are just as relevant here. The government’s planned wide-ranging reforms to the British accountancy profession and company law are a direct result of events in the US.

British reforms focus on the appointment of auditors, including a requirement for more transparency of auditor processes and practices, as well as restrictions and limits on the length of their appointment.

The letter sent by Roy Ayliffe, CIPS’s director of professional practice, to the secretary of state for trade and industry, Patricia Hewitt, is clear about the best way to improve auditor performance. A procurement professional should sit alongside the non-executive directors on the audit committee.

Choosing an auditor, like any external resource, is a procurement project, Ayliffe writes. It requires market analysis, supplier assessment and contract management. It is not about appointing people on the basis of having an existing relationship with them or because they have been recommended.

Ayliffe supports the report’s recommendations to beef up the audit committee system now operating in many companies.

If the reforms become regulatory law, the door is open for purchasers to be involved in auditor appointments because of their skill in negotiating, performance reviewing and contract management.

A similar situation existed in the 1990s when purchasing first began to get involved in buying marketing services. Purchasers had to show marketing people they understood the issues surrounding the appointment of agencies. Marketing had to consider value-for-money parameters by which agency performance was to be judged.

The involvement in appointing auditors raises many difficult issues for purchasers. They will need to show they have a sufficient grasp of finance and financial statements to be able to judge the performance of auditors.

A major aspect of moving into auditor appointment will be the ability to work with an audit committee that consists of non-executive directors. Auditor appointments have traditionally been off-bounds to procurement professionals. There is a common belief that the appointments are made in old-boy networks at the highest level.

Breaking down resistance to have purchasers sit at this table will be one of the hardest sells ever for purchasers. They will have to have a good dose of diplomacy and tact to interact with this team, where many will have previously considered a purchasing person an outsider. The purchaser will have to win their trust and confidence.

Currently, the board of directors chooses the auditor on behalf of the shareholders. The board takes advice from an audit committee, if one has been set up, as this is not required by law. This committee takes advice from the finance director.

The interim report from the government’s Co-ordinating Group on Audit and Accounting Issues recommends that setting up an audit committee be legally required and that its responsibilities be formalised in law. The committee should be able to approve the auditor, all non-audit financial services from the appointed auditor, when to change auditors and when to go out to tender.

Purchasers, as part of the committee, will then be faced with the highest legal responsibility, along with the non-executive directors, for auditor performance and company financial disclosure. When purchasers finally get their seat, they may find that the non-executive directors and the accounting and procurement professionals are not that far apart in their understanding of how best to appoint an auditor.

The theme of this year’s CIPS conference in October will be which issues are on the chief executive’s agenda, and how purchasing can help to resolve them. Finding the right auditor to assure probity in financial statements must be high on the list.

SMaug2002

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