Mending Fences

CFO-auditor relationships aren't as fractured as they once were. But there's still room for improvement.

It’s a practice that the FRC has been undertaking for some time. But now the UK body is going one step further than the APAK — and even the US’s PCAOB, considered the standard bearer among oversight bodies. Starting this year, it will publish separate reports on each of the big audit firms that it inspects, rather that a general, consolidated report as it had done in the past. Moreover, it will issue reports on the findings of the reviews of the 100 or so audits it undertakes every year, which will be sent to the auditors for them to discuss with their clients’ directors.

The FRC says there are a number of reasons why it is adding this additional level of transparency. “One is that it’s been given a push by audit committees, which [under UK code] are required to assess auditor effectiveness,” George explains. “It also links to market competition — if directors know more about the quality of individual firms and the performance of their own auditors, they might get a better idea of who to select. It will help companies distinguish auditors in different ways than merely using size for a proxy for quality. It may or may not be helpful, but one can be sure that recipients of such independent reports will take notice of them.”

On Edge

One can also be sure that CFOs in the UK, and eventually in other countries, can expect “a more cautious approach [from their auditors] because there is someone always looking over our shoulders,” grants KPMG’s Bennison. But he adds there’s something beyond stricter oversight that’s now keeping auditors on the edge of their seats — the economy.

To complement our survey of finance executives, CFO Europe polled some 170 Big Four auditors in Europe, asking them about what could negatively impact CFO-auditor relationships in the months ahead. Far more than regulations or disputes over fee levels, the auditors voiced concern about the knock-on effects of the credit crunch and economic slowdown.

Bennison expects “some quite fraught discussions” as clients assess the damage of the current economic downturn on their businesses. “Our job is to ensure that the board and the CFO understand why we are asking the questions that we are, why we want to see the bank facilities, why in some cases why we want to talk to the bank director,” he says.

Jock Lennox, a senior partner at Ernst & Young and head of its CFO programme, agrees that some relationships will feel the strain, requiring more care and attention than during more buoyant economic times. “If you just rely on the formal process when times are tough, you won’t have a good outcome… Sometimes it’s just a five-minute phone call that does it.”

But Lennox adds that lurking in the shadows during all this is the biggest unanswered question that has simmered under the surface of every CFO-auditor relationship over the past years: “What characterises a successful CFO-auditor relationship and how do you balance that with independence? You can be independent and have no relationship but if that were the outcome, we would never be able to do our job.”

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