June 14, 2012 / 5:16 PM / 5 years ago

UK company audits do not question "racy" judgements

LONDON, June 14 (Reuters) - Company audits were a boiler plate utility and failed to challenge “racy” judgements made by management, top shareholders told a competition probe into Britain’s audit market.

The Competition Commission published on Thursday a digest of what shareholders told its inquiry at a private hearing in April.

“Auditors had lost the ability to resist unrealistic and racy judgements taken by directors,” the digest said. “Instead competition was now partly on the basis of reputation for sector expertise and partly on the provision of other services.”

The views echo those of the sector’s policeman, the Financial Reporting Council, which said in its annual report this week auditors were not sceptical enough.

Policymakers have shone a spotlight on the sector after banks that were given a clean bill of health then had to be rescued by taxpayers during the 2007-09 financial crisis.

The shareholders were represented by the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds, which combined account for close to 5 trillion pounds ($7.8 trillion) of investments.

They said the audit report had only “minimum perceived value” because it was “quite boiler plate” and “uninformative”.

“Auditors rarely provided an emphasis of matter paragraph in the audit report because it was perceived as giving a negative signal,” the digest quoted shareholders as saying.

The Commission is considering if “remedies” are needed in a UK market dominated by the Big Four - KPMG, Ernst & Young, Deloitte and PricewaterhouseCoopers.

The European Union is approving a law that would shake up the sector by introducing rotation or mandatory switching of auditors every set number of years.

The shareholders backed rotation every five years, saying they had little contact with auditors or were consulted on when an auditor was changed.

They were concerned by the lack of competition and switching in the market, especially in the financial sector.

“The representatives did not consider that there was a difference in audit quality between the Big 4 firms and the others,” the shareholders’ digest said.

They asked for “checks and balances” on Roger Davis, a former PwC partner now advising the Competition Commission, which replied that the sole decision makers for the probe would be its five group members.

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