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
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
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
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.
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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
“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