Page 33 - Auditors Article

Part of the problem lies in the shift from cost-based (which

was relatively useless anyway) to future estimates. There is
little, if any incentive for auditors to question the future

estimates of valuation and performance provided by the

client. After all, these estimates influence such a large

proportion of the executive remuneration package i.e. stock
price that the auditors who have built-up a cosy relationship

often of decades duration are unlikely to challenge them. In

the case of Patisserie Valerie, it was a fourteen-year

relationship. The company Grant Thornton audited had a
stock of approximately £8,000 but a value, predominantly

prime location outlets of £440m. Within a week the valuation

fell from £440m to £13.5m (KPMG). Wherein lies the truth? Is it
simply that the executives and the ‘Big Four’ guesstimate value

based on their cosy relationships?

The thing to recognise about the auditing industry is that there
is no easy fix. If reform is to occur, it cannot be orchestrated

by the auditors - the Big Four - themselves. After all, as

auditors and consultants the ‘Big Four’ are unlikely to speak ill

of products and services that they have helped develop or risk
damaging their relationship with a client base of long-term

duration.

The solution may be as obvious as creating a separation of

audit and non-audit services similar in a sense to the

separation between commercial and investment banking. If

this had been the case with Patisserie Valerie it is possible that

it would still be in existence today particularly if the auditors