Audit sector ‘failing society’, says leading think tank

The Institute for Public Policy Research (IPPR) is calling for a “shake-up” of audit sector rules to boost trust in company finances and the wider economy.

In a statement, the think tank referred to the sector as “failing society”, and criticised its limited scope and lack of rigorous auditing practices.

The group’s report identified that current audit practices can lead to excessive risk taking and bad investment decisions, all while enabling some bosses, intermediaries and shareholders to get large pay-outs.

Carsten Jung, IPPR’s senior economist, said: “Auditors should be the gatekeepers helping keep financial mismanagement at bay, yet too often they are failing to do so and are failing society. To meet society’s expectations and needs, there needs to be profound audit sector reform.

“A well-functioning audit sector should be expected to flag problematic accounting practices and risky business activities before they turn into damaging debacles. However, the current legal set up does not require this from auditors.”

He added: “Restore public trust in audit firms is essential for them to become the trusted referees of corporate Britain. With this status gained, it could lead to a virtuous cycle in which trust fosters investment, business development and economic dividends.”

Shreya Nanda, an IPPR economist, said: “At present, our corporate finance system does not account properly for risk, encourages firms to take on excessive debt, and allows firm insiders to prioritise their own short-term financial interests above the interests of workers, pensioners and suppliers, and the long-run financial sustainability of the firm.

“We need to reform this system to stop more firms going the way of Carillion, BHS and Patisserie Valerie.”