Sceptical scrutiny is best way to keep auditors honest

It's not just the Enron scandal that should haunt the auditing profession.

Frank Partnoy's book The Match King lays out in shocking detail how in the 1920s, Ivar Kreuger, the entrepreneur behind Swedish Match, bought off AD Berning,his auditor.

He paid for Berning's foreign trips, gifts and even medical fees when the strain of covering up for creative accounting in the Kreuger empire triggered a nervous breakdown.

Berning's bosses at Ernst & Ernst duly rewarded him with a partnership because, Partnoy writes, "he had persuaded Ivar to pay the firm more for its audits, as well as additional fees for consulting and tax advice. The Ernsts were proud of everything he had done".

In the light of such scandals, any attempt to defend the self-regulating status quo in audit oversight sounds like an attempt to lubricate the wheels of corporate corruption.

But UK regulators and legislators should pause before imposing new caps on the non-audit services that auditors can provide to their audit clients. Consider instead how far the profession has come since the Enron-Andersen scandal.

Non-audit fees paid by FTSE 100 audit clients have dropped since 2002, both in absolute terms and as a proportion of audit fees. Companies' audit committees have stepped up their scrutiny - almost a third of listed UK groups surveyed said there were instances when directors had ruled out buying certain non-audit services from their auditors.

It's right that the whole paraphernalia of self-regulation should be subject to constant review. The Auditing Practices Board's consultation on non-audit service restrictions - out today - is part of the continuing effort to ensure history does not repeat itself. But prohibition of the audit/non-audit overlap could reduce the quality and efficiency of audit and non-audit services, without really improving auditor independence.

Regulatory watchdogs and political attack dogs should not leap to outlaw the overlap until they have considered whether the existing tools could be used better. Non-audit services could be disclosed more clearly. That would allow shareholders and other outsiders to separate the potentially dodgy from the merely dutiful more easily. Audit committees could further sharpen their focus on auditors and shareholders their focus on audit committees.

Ivar Kreuger's accountants "suffered little punishment". Berning was actually credited with exposing the Match King's fraud. Ernst & Ernst's consulting fees never came to light.

But healthy suspicion of auditors cosying up to their customers is one of the lasting legacies of the Enron scandal. As long as that level of scepticism can be maintained, there is no need for stricter rules.

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Being in manufacturing right now is like playing pass the parcel with burning coals - no one wants to be left holding inventory when the music stops. Nowhere is this more evident than in the technology sector. Wolfson Microelectronics is the latest casualty of short lead times and volatile ordering patterns. The Scottish chip designer has warned that fourth-quarter revenues are likely to be lower than last year. It has sought to curb its own stock accordingly, and now sits on inventories that are half the level of last year, on a revenue basis, down to 12-13 weeks from the more typical 15-16 weeks.

To be accurate, the group's problems are not all to do with nervy customers. Wolfson failed to get its chips into Apple's latest and top-selling iPhone 3GS, after winning the contract for its predecessor.

As customers flock to the latest whizz-bang handsets, Wolfson's loss is US rival Cirrus Logic's gain. Indeed, even the industry trends seem to be magnified at Wolfson: competitors such as CSR and Arm Holdings sounded slightly more upbeat in their latest updates.

At first blush, going back along the supply chain offers some support for industry optimism that the system is returning to a healthy balance.

Chipmakers have spent much of the year running well below capacity. Some, such as Germany's Qimonda, have even quit the scene altogether.

But all may not be what it seems. For the most part, assembly lines have simply been mothballed, not axed. Hefty capital expenditure, or government largesse, is still being shovelled in.

At the other end of the pipeline, the picture is fuzzier than on the most old-fashioned cathode-ray TV. Will Christmas stockings be stuffed with electronic gadgetry or, as other retailers suggest, Monopoly boards? Until that question can be answered, Wolfson's caution looks to be the smarter response.

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