U.K. Companies Looking Ripe for an Auditor Revolution
more in Heard on the Street »By ANDREW PEAPLE
After the shareholder spring, how about an auditor autumn?Earlier this year, investors pushed successfully for some major U.K. companies to change their pay policies. Now they have accounting firms in their sights. Some, including Legal & General LGEN.LN -1.88% Investment Management, one of the largest owners of FTSE 100 shares, want companies to change their auditors at least every 15 years and cut back on nonaudit consultancy fees. With the European Commission already considering new legislation, company boards would do well to heed investors' calls.![[image]](http://si.wsj.net/public/resources/images/MI-BR228_AUDITH_NS_20120917184503.jpg)
The financial crisis exposed major weaknesses in the quality of accounting standards. But it has also raised concerns about the way those standards are being applied. Auditors are appointed by the board and report to shareholders. But the risk with long-standing auditor relationships is that the accountants may become too close to company executives, prioritizing their concerns over their duty to investors.Banks are a particular area of concern. The U.K.'s Financial Services Authority complained this year that Barclays BARC.LN -1.14% has consistently taken an aggressive approach to interpreting rules and regulations, echoing consistent complaints from shareholders in recent years over some of its practices. Barclays has had the same auditor, PricewaterhouseCoopers or one of its antecedents, since the 19th century. A fresh pair of auditor eyes might have helped curb any excesses: Auditors can be just as reluctant to challenge their own past judgments as they are willing to go against the wishes of the companies that pay their fees.Sure, shareholders already have a statutory vote each year on the reappointment of the auditors. But such votes rarely lead to change. Shareholders often have other priorities; and because companies disclose little about their dealings with auditors, they often have little firm evidence on which to base a negative vote. In practice, shareholders have left boards to appoint auditors, which in turn have relied on management to choose. The result: On average, FTSE 100 companies have had the same auditor for 48 years, according to the Universities Superannuation Scheme, the U.K.'s second-largest pension fund.Regular auditor changes could help restore confidence in the independence and credibility of audited accounts. Audit quality should improve, in part because audit firms would know their work would be subject to peer review by their successors. Auditors complain that enforced rotation would be costly and disruptive, but a change every 15 years hardly looks unmanageable.Besides, it is in everyone's interest—shareholders, companies and accountants—to avoid the blunt instrument of new statutory rules. As with the shareholder spring over executive pay, all the more reason for investors to take the lead and push for change themselves.Write to Andrew Peaple at andrew.peaple@dowjones.com
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