What does 'independent' really mean when it comes to contract compliance auditors?

As I read through the agency’s feedback on our draft audit report, I was somewhat surprised. Apparently, “We [the agency] provided all necessary documentation during the audit. There was only one exception, the [words deleted].” The reason why they hadn’t complied with this one (as it happens rather important) clause, was they had a group wide policy that they would only disclose this information to the Big 4 audit firms.

As you can imagine, this was a red flag for both Financial Progression and our client. I duly set up a phone call with the Head of Finance at the agency to unpick the reasons for this blanket refusal to comply with the terms of the contract by denying full financial disclosure to an independent and regulated firm of Chartered Accountants such as ourselves (in case you didn’t know we are a member firm of the Institute of Chartered Accountants in England and Wales).

The reasons why may actually surprise you!

It appears that the agency had been burned in the past by so-called ‘independent auditors’, using their ‘access all areas pass’ to gather data and use it for purposes other than the proper conduct of the audit i.e. subsequent benchmarking activities.

It appears that the agency had been burned in the past by so-called ‘independent auditors’, using their ‘access all areas pass’ to gather data and use it for purposes other than the proper conduct of the audit i.e. subsequent benchmarking activities. The agency group had therefore decided to issue their ‘Big 4 only’ restriction as they believed that using audit firms that were truly independent and regulated by certified public accountancy bodies such as the ICAEW would be, just that, truly independent, professional and keep confidential information, well, confidential.

To cut a long story short, I then explained about the types of firms that conduct contract compliance audits. They are:

1. The Big 4 – regulated by the ICAEW (and other certified public accountancy bodies around the world in the countries in which they have offices) and who do both statutory (year-end financial statements) and contract compliance audits (as well as providing a host of other services such as tax, insolvency, corporate finance, management consultancy etc.). They use qualified or part-qualified accountants in the team on the ground to do the actual audit work. These will typically be graduates with 0-5 years’ experience and they will be asking questions of your agencies about your very important, and often sensitive, relationship with them. Financial Progression simply wouldn’t allow that to happen: when and if we bring a graduate onto an audit project, their work and key interactions are closely supervised and tightly managed by compliance audit professionals with many years in the business.
2. Financial Progression (us) – also regulated by the ICAEW (we service global clients from our offices in the UK) and which only does contract compliance audits of marketing agencies (creative, media, PR, digital, sales promotion, events etc.). No statutory audits for us (our choice). We only use qualified accountants on jobs and, unlike the Big 4, our team members on the ground doing the audit work have all spent large proportions of their 20 year plus careers in senior finance roles in industry, so have the knowledge, skills and experience to handle the delicate situations that occur before, during and after an audit.
3. Consultancies – not regulated by the ICAEW or other certified public accountancy bodies. Or, for that matter, any professional accountancy body. They may or may not use qualified accountants, though they typically do have relevant agency finance experience. Based on our conversation with the agency, it seems that some of these organisations may have (or have had) conflicting commercial priorities that mean they cannot be considered truly independent.

What does independent actually mean?

In our opinion, a contract compliance audit firm can only truly claim to be independent if it is subject to the rules, regulations, ethical guidelines and quality assurance regime of a professional accountancy body, such as the ICAEW.

‘Big 4 only’ audit clauses are ‘null and void’

Such clauses are considered by the EU and member states to be anti-competitive.

The Head of Finance found this information illuminating to say the least, and was interested to hear that, following a decision of the European Parliament in April 2014, ‘Big 4 only’ audit clauses in commercial contracts are now ‘null and void’, at least for statutory audits (i.e. year end financial statements). As we said to him, it is therefore only a matter of time before clients will not accept their ‘Big 4 only’ audit policy. Such clauses are considered by the EU and member states (the UK will be announcing its own conclusions in late 2014) to be anti-competitive. After all it is competence, rather than size, that matters more.

Our independence means we turn down work worth six figure amounts

Our independence and status as a member firm of the ICAEW is incredibly important to us. It is one of the ways we believe that you can be confident you will only get the facts reported back to you in our audit reports, with ‘opinions’ kept to a minimum.

…for the record we don’t do, nor have ever done, agency fee benchmarking work…

As we told the Head of Finance at the agency, our independence doesn’t always come without a cost. A client of ours was so delighted with a piece of work we did for them, that they invited us to tender for a benchmarking exercise of their creative agencies in 20 countries around the world. Whilst we were very flattered to be asked, we explained immediately why we couldn’t take part. We then offered to introduce them to an agency fee benchmarking specialist who was ideally placed to do this work. If we had sought to tender, it would have compromised our independence as contract compliance auditors and broken an ethical guideline that we are only allowed to take on work we are competent to do (for the record we don’t do, nor have ever done, agency fee benchmarking work). The client was delighted by our immediate honesty and, as a result, has told us that they plan to work with us again later in the year

A truly independent contract compliance auditor, as well as being regulated by a professional body such as the ICAEW, will decline work that could compromise their independence or cause them to break ethical guidelines.

In summary

If you want the peace of mind that accompanies working with a truly independent contract compliance auditor (with international experience) who will only use confidential information for the proper conduct of the audit, then Financial Progression or the Big 4 will give it to you.

P.S. A week after our discussion, the agency contacted our mutual client to say that Financial Progression would be allowed access to the previously restricted documentation.