OK… Here we go!
The two most important factors currently affecting the audit industry:
If that’s not clear enough do ask!
The credit crunch does not directly affect audit firms so much as the way it affects the work auditors do.
One of the key things that auditors do is test to see if the client they are auditing is a ‘going concern’. This means that they are likely to survive the next 12 months in business without any major risks. The credit crunch is a buzz word for an increasing cost of borrowing. It will affect all clients who have borrowed money, and the question for auditors is, will this increased cost of borrowing put some companies over the brink, and they will have to default and close their business?
The second aspect of the credit crunch is for clients involved not just in borrowing but also in lending - i.e. banks. Banks have lent too much, to people who cannot repay, and the bank has to foot the shortfall.
This is what happened to Northern Rock. Northern Rock was given a clean bill of health by its auditors, PwC, who I believe are being sued by the shareholders. This is a key example of how the credit crunch has affected audit - PwC should have examined Northern Rock’s debt more carefully and identified that it was a significant risk.
If you have any questions please fire away.