Reward junior auditors who speak up, says think tank after scandals

Auditing giants must celebrate and promote staff members who flag potential flaws and even fraud in their clients’ accounts or risk repeating the mistakes that have thrown the sector into a series of scandals, according to an influential think tank.

The Institute for Public Policy Research (IPPR) called for a major change in the culture of the country’s auditing profession, to reward behaviour that might not bring immediate financial benefits for the firms.

It follows a series of high-profile scandals in the sector, which has fallen short on many recent audits.

Big-name collapses including Carillion and Thomas Cook have recently raised questions about the practices of the UK’s auditors.

The IPPR echoed previous calls for a separation between the auditing and consultancy wings of big audit companies.

In many cases the big four auditors make just as much, if not more, money consulting for companies as they do for auditing their books – creating a potential conflict of interest.

The report also called for a new audit regulator, an ethical standard aligned with the public interest, and an overhaul to accounting rules to make sure businesses cannot pay out more than they earn to shareholders.

But its calls went further than these commonly repeated recommendations in stressing the need for big changes to the internal culture of auditors.

Partners should be paid in a way that rewards the quality of an audit, rather than “adjacent commercial aims”, the IPPR said, while junior auditors – who are often the first to find difficult issues, should be encouraged to speak up.

“Career incentives within the audit industry are too reliant on giving good news rather than flagging potentially bad news early on,” said Carsten Jung, the IPPR’s senior economist.

“Audit firms need to be given a clear public purpose of comprehensively challenging businesses where challenge is needed. To achieve this, it’s vital to put culture change at the heart of the revamp of the audit industry.”

Shreya Nanda, IPPR economist and the report’s co-author said: “Audit firms should openly discuss past cases of audit failure, and routinely analyse their root causes with new joiners.

“To this day, Nasa analyses the root causes of the explosion of the Challenger spacecraft as part of the induction for new staff. To prevent another Carillion, audit firms should learn from Nasa, and do just the same.”

IPPR counts big-four auditors KPMG and Deloitte among its donors.