The harder they fall: Will the Big Four survive the credit crunch? By Rob Lewis

magnifying glass on a pile of pound coinsRob Lewis wonders whether the events in America will determine the fate of the Big Four.

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Comments

Change - or be replaced!

Rob Peddle | | Permalink

Dennis,

Unfortunately, you are probably right. If the Audit industry will not change itself when there is SO MUCH evidence around that it needs to, then it will either have to be changed by some other 'governance' mechanism or it will wither and die, replaced by something more relevant to what the users of its output needs.

The commercial World is changing fast, with stakeholder pressure becoming far stronger and companies having to react to this rather than ignore it. It is not only financial probity that they need to deliver, but a raft of economic, social and environmental requirements, all increasing daily. Management’s role will be to decide and deliver a reasonable balance across these issues and be able to demonstrate they have done so to those stakeholders who are impacted. Traditional Audit - of whatever kind - fails to address this by only looking at individual elements of the business, not at it as a whole. Management need to use this broad view to prevent things going wrong and auditors need to use it to check all is OK.

There is therefore a need for companies to operate and manage themselves as a living System, not an agglomeration of activities or sub systems. We call this System Thinking (note the no 's' on System!) and tools and approaches are in the public domain to achieve this - see www.systemthinking.net .

They (and third parties) then need to audit, assess, risk identify - or whatever other term is needed - against how this System operates in real life, not on paper, reviewing the behaviours actually being experienced to identify the real risks inherent in the business. This needs to be consistently carried out in a way that significantly reduces the impact of individual auditors’ prejudices, pressures or whatever else makes them see and report things differently to real life. Using IT solutions with expert system analysis engines provides this consistency and hence confidence in what is actually happening.

We are already changing the Management System World by introducing these ideas and tools into CSR Management System design and Internal and third party auditing. If anyone in the financial and accounting world would like to see how these could be applied to address the current confidence issues, we would be happy to share our experiences – you can contact me through rob.peddle@the-hpo.com .

Thanks

jrpllc | | Permalink

Dear Rob -- Thanks for the reference. It's a quote I am very happy to articulate and expand upon.

As Francine knows especially, I've been trying to contribute to this theme for quite a while -- in the International Herald Tribune, for the period I was privileged to be its financial and accountancy columnist, and now on my own -- see Re:Balance -- http://www.jamesrpeterson.com.

dahowlett's picture

Bingo!

dahowlett | | Permalink

@rob - at last somebody gets it - well almost. I don't think we'll see 'audit' of the kind you are describing or rather it won't be called by that term. The market rarely if ever takes cognizance of the audit certificate EXCEPT when things go wrong. Ergo - prevent the thing from going wrong.

That means a massive retooling of the industry to understand things that today it is not qualified to express an opinion upon and which are not being taught.

Buying up risk experts is not the answer. There needs to be a fundamental rethink about what information stakeholders need. It is a radical rethink not sticking plaster that's needed.

The problem is that the incumbents cannot see beyond their traditional role. Or if they can, then they have little idea how to handle it.

The old Compliance model of audit is dead

Rob Peddle | | Permalink

Rob and the other contributors are absolutely right - the existing model of auditing is dead. It has been proven to fail in far too many cases. The main reason for its survival is that no alternative has been found - stay with what you know even if it does not work!

The auditing model used in most other 'third party' audits suffers the same problem. Just look at ISO9001 as an example. Even assessment techniques like EFQM are creaking under the surface if you look closely.

So, what is the alternative? Compliance is only part of the picture - it tells you about the past, not risks to the future. Plus there is always the ability to make sure compliance information shown gives the impression that all is OK and the need for the auditor to 'interpret' this into their final report. Current methods are fraught with problems and provide little real confidence in the report. And Confidence is what it is all about!

What matters is a clear and consistent picture of the real risks for the future inherent in the way the company is operating. Real and accurate lead indicators or risk rather than potentially distorted incomplete lag ones based on compliance.

The solution? To identify future risk there is a need to understand the behaviours being exhibited and experienced across the business. These are lead indicators and drive ongoing compliance as well as effectiveness and efficiency. Behaviours of the people within the business indicate whether compliance will continue. Many of the things that drive effectiveness (i.e. delivery of objectives and performance) cannot be documented, and cannot be subjected to compliance checks. It becomes clear that the current auditing model is past its sell by date.

Tools that address this fault with the current audit model are now available. They consistently analyse behaviours and report the levels of risk based on what actually drives ongoing compliance and effectiveness. They can create meaningful and credible benchmarks. More at http://newsweaver.co.uk/cqi/e_article001096736.cfm?x=bcFGKF5,b6HhKKCc .

The auditing world needs to accept that their current model is broken before they will accept the need to change. Fear of not having an alternative stops this admission, but with the development of such tools there is no reason not to admit it. Who will be the first to break ranks? It will be interesting to see ....

Is this part of the solution?

AnonymousUser | | Permalink

In my view the Big Four should be eliminated from the audit market.

Here in the UK the problem began in 1990 with the House of Lords Caparo decision. This took away an individual shareholders right to make their business decisions on their firms audited accounts. With this right broken, it was entirely predictable that a companies hired hands aided by an inventive accounting trade, sleaze politicians and captive regulators would create an “age of irresponsibility” to maximise their own short term profit.

As common sense hopefully returns, the sanctioning of those responsible for this situation must become paramount and exemplary to restore public confidence in the auditing process.

A gruesome log of the events leading up to this credit crunch can be seen at :
http://visar.csustan.edu/aaba/aaba.htm

It's Not "If" But "When"

fmckenna | | Permalink

It's wonderful to see Accounting Web finally focusing on this issue. Dennis Howlett and I have been writing about it for a while. In fact, the Big 4's bankrupt business model is primary the focus of the blog I've authored for the last two years, re: The Auditors. (www.retheauditors.com)

The litigation, the layoffs, and the lack of professional due care exhibited by the audit firms are just the tip of the iceberg when talking about the Big 4's vulnerabilities. They haven't prevented their clients from failing, warned us adequately of imminent failures, nor helped craft solutions to minimize failures in the future. They are impotent "bagmen," collecting obscene fees while providing a service with no value to investors or anyone else with a stake in global capital markets.

I'm keeping a scorecard of the Big 4 and their increasingly limited universe of clients on my blog. The article, "My Clients Are Failing, My Clients Are Failing," is my way of saying, enough is enough. A new and better solution to safeguarding shareholder and other stakeholder interests is sorely needed.

dahowlett's picture

Not the first

dahowlett | | Permalink

Rob - you know that Francine McKenna and I have been talking about this for some time.

Check Francine's blog for continued commentary on this. In particular, this piece back in June should be instructive

Check for more corroboration and this piece on EY's future

More to the point, if another of the Big 4 fails then it is the end of audit as we know it.