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Mervyn King speaks out against audit only firm proposals

Corporate governance champion Mervyn King has labelled proposals to outlaw audit firms from providing advisory services a “disaster” that could have an effect on audit quality.

King, the chairman of the International Integrated Reporting Committee, is one of the most high profile opponents to audit-only firms.

In an exclusive interview, King told The Accountant the separation of audit from advisory services was the biggest issue facing the accounting profession today.

“I believe that you need that skill to be a good auditor,” King said. “You need business judgement to be a good auditor. [It’s important to have] that advisory knowledge at your disposal, either from a colleague or having spent some time in the advisory practice.”

King advocates accountants switching roles between advisory and audit during their career because “it just makes the auditor more skilful and the audit more complete and more informed”.

EC Internal Markets Commissioner Michel Barnier and US Public Company Accounting Oversight Board chairman James Doty are separately proposing audit-only firms and mandatory audit firm rotation among a raft of controversial reforms on both sides of the Atlantic.

This could have a major impact on how professional services firms are structured. In particular, the separation of audit and advisory threatens the livelihoods of four largest accounting firms, PwC, Deloitte, Ernst & Young and KPMG, who typically generate more than a third of their fees from advisory services, often to audit clients.

The EC would also like to introduce mandatory firm rotation after nine years and mandatory re-tendering after five years in a bid eradicate a perceived lack of independence between auditors and clients.

King said rotating the external auditor every nine years was a “crazy idea” that could lead to a knowledge drain.

“Just from practical experience, I know that it takes the external auditor about three years to understand the business of a company,” he said.

“Then in the last two years they know they have to move out and that instead of PwC being the auditor KPMG is going to become the auditor then they are going to become de-motivated – it is a ridiculous situation”.

King said an example of why mixing audit and advisory skills is important is the role accountants can play in helping corporates change their mindsets about integrated reporting. He said the knowledge an audit firm has about a company makes them ideally placed to also advise on how integrated reporting can be beneficial.

*Mervy King will feature as one of the Top 30 most influential people in accounting in December's edition of The Accountant.

 

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