When the topic of an afternoon drinks in Mayfair after a rather splendid Christmas buffet with an investment bank was (the failure of) the audit of real estate companies, you know there is a big problem.
The moan of the moment was that no one at the table had managed to get their accounts signed off on the schedule agreed. This cannot be a co-incidence.
I have done a little bit of research on this since. One of my contacts is a highly respected ex-senior audit partner of one of the so-called ‘big four’. He tells me that he is involved with three real asset companies and none of those companies were through their audit by mid-January, having targeted before Christmas. In his words, ‘it wouldn’t have happened in my day’.
Every finance director complains about fees of course, but a couple of examples from accounts I have quickly reviewed show eye-watering increases in fees over time. How this is justified is beyond me, but it is an industry phenomenon. ‘If the service was better’ said a friend, ‘perhaps it would be bearable, trouble is, it is not, it is meaningfully worse’.
I even found one company out there where there is a large fee in the accounts, yet the audit is disclaimed. Ok, I can see how we get there, but not for a second year in a row!
Another of my contacts explained the trouble their company had with their auditors last year. Apparently, the remnants of Covid and work from home are still very much at play, and the laissez faire attitude of a ‘big four’ partner left the board so disenfranchised that they felt they had no alternative but to let that auditor go. It was the reaction that shocked them most…a shrug of the shoulders and a palpable sense of relief from that auditor that a ‘difficult’ client could be replaced, easily apparently. It is a cartel, so there remains plenty of work.
The question is, why is this happening? The answers were mixed but two themes came through clearly. Apparently, auditors can no longer find juniors to do the grunt work, and those juniors no longer want to work on Fridays (another complaint that I heard more than once!) and secondly, the partners of the audit firms are considerably more scared of sanction from their regulator, the Financial Reporting Council (FRC) than they are from clients. Even if I can find it in me to offer some charity to some of the practical challenges (reluctantly I must admit) this latter argument is simply unacceptable.
I have also heard it said more than once that the regulator is ‘in it’ with the auditors. The FRC now demands ever more from auditors who demand the same from weary finance directors and their teams which boosts the fees of the auditors, and so on. One finance director tells me he received a request for over 100 new written papers from the auditor that did their accounts the previous year. All in the name of protecting the public of course, though there are far more cynical interpretations out there. The hidden text of all of this is that audit is not financially sustainable these days and fees must rise, so a regulator that supports that notion is to be welcomed. One thesis suggested to me that those that worked for the regulators were typically those that had not made it in the profession itself and were being choreographed by the auditors! All rather uncomfortable if that was true, but I heard it more than once so pass it on without comment here.
We might remember here the 2019 Brydon Report which argued for the need to improve audit quality and rebuild trust by addressing potential conflicts of interest, including the separation of audit and advisory services. Sadly, with the benefit of hindsight we can see that this proposed ‘cure’ has probably made the patient worse. The RICS should be thankful that the Independent Review of Property Valuations did not recommend the same. I hear that it was a real possibility at the time.
All this is very depressing if you are a company director or a society observer, and I suppose, if you are an aspiring auditor. As a shareholder I doubt you feel any more comfortable today than you did ten years ago (noting of course that there have been some terrible failures, e.g. Carillion).
The new Audit Code, effective since January, provides an expanded mandate, (it reads to me as almost unlimited in scope) and a much greater influence for internal audit functions. If you don’t have one of those, heaven help you. Of course you can out-source that function, but that would be to err…. auditors. It won’t then save you from the external audit at the end of the year either and that will have to be done by a different auditor! And of course, the 2024 Code Standards for External Audit increase the scope of the 2018 Code. Jobs for the boys.
Watching the increased effort required each year to get through the audit process leaves me weeping. Just think how much more productive we could all be if we could get on with the job of making money for our shareholders if we didn’t have our finance teams distracted for three months. I really do despair. It is a societal phenomenon that there are more and more people watching fewer and fewer people doing the work.
And you must pity the poor audit committees these days. It has become seriously burdensome. I had some experience some years ago of chairing an audit committee, but I would run from that appointment now. Queue fees for audit chairs rising too! I have to say that this is probably fair!
But before I get too worked up, I see light at the end of the tunnel. Of relief to finance directors and audit committees, and probably shareholders who have to fund this nonsense, I can see that we are not far away from an artificial intelligence run audit. I confidently predict that the machine will turn up on Fridays, will not be as subservient to its Regulator, (or if it is, it will re-invent itself quickly) and will therefore prove to be an awful lot quicker and cheaper. Perish the thought that it might prove a whole load better than the human equivalent at assessing what really matters and what does not.
The audit profession might then become one of those things of the past, a bit like Encyclopedia Brittanica salesmen. If so, they will have brought it on themselves with Sir Donald’s inadvertent help.
This article was originally published in The Property Chronicle Spring 2025 Issue.
