Auditors who challenge clients should be celebrated and promoted, according to a new report from think tank IPPR, in order to better serve society as a whole.
A complete culture change is needed within the UK’s audit industry to ensure that public trust is fully restored, the think tank said in its latest report.
Without a new approach that encourages challenge to clients and speaking up at audit firms, there is a risk past mistakes will be repeated, IPPR added.
Audit firms have come under increasing pressure in recent years following accounting scandals and administrations such as Carillion and Patisserie Valerie that undermined public and investor confidence in the sector.
IPPR said auditors who challenge clients should be promoted regardless of whether the criticism results in immediate financial reward for the audit firm.
The think tank also said junior auditors, who are often the first to encounter difficult issues during an audit project, should be encouraged to speak up, and partner compensation should be reformed so that it rewards audit quality, rather than adjacent commercial aims.
IPPR senior economist and lead author of the think tank’s latest report on audit reform, Carsten Jung, said: “Auditors need to define and articulate a purpose beyond profit, and put it into action – otherwise they will breed cynicism in their workforce. They should see their role as doing the detective work on businesses that society needs to ensure that they are run responsibly, with the wider public interest in mind.
“Career incentives within the audit industry are too reliant on giving good news rather than flagging potentially bad news early on.”
IPPR said firms should have a culture where they openly discuss cases of audit failure, and conduct regular reviews of culture.
Shreya Nanda, economist and IPPR and author of the think tank’s first report on audit reform, which said the audit sector was “failing society”, added: “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.”
In its previous report IPPR said there was an “expectation gap” between what audit currently assesses and what it needs to assess to fulfil the expectations of the general public.
The think tank believes a large number of small scale Carillion-style failures are happening each year.