Break up the Big Four: The radical proposal that's going mainstream
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Francois is a writer, editor and broadcaster specialising in business.
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Its not hard to do.
Its just not profitable.
If 4 became 8 by mutual consent of the cartel, ie jumped before being pushed it would reduce the main metric partners judge themselves on. ie how many millions they have made from writing the reports they are asked to write by big business and government.
Eg EY's laughable justification for HS2, who's nose is also massively in the trough for fees on........HS2. It just seems to entrenched now they don't even try and hide it.
Hmmm - we've seen a similar problem with the Banks
Also there was a similar shake up a number of years ago, but the fundamental problem still exists that the Audit firms also have (lucrative) consulting businesses and the problem also lies with the Directors and shareholders of the companies being audited, who should be looking out for such conflicts of interest when appointing.
In my opinion, breaking the big 4 up will not make much difference (BT, Banks...) but forcing the PLC's to change auditors, say, every 3 years might, especially if those auditors are appointed by the Government (as an independent body) rather than by the directors. Combine this with some real power to do something when audits fail and we might get somewhere.
There is an urgent need to decouple audit from the other services accountancy firms offer and not being incentivised to "win other business" off the back of audit would allow the Audit and other services to stand side by side, but also on their own merits.
I don't know, but here's a slightly different thought. How about we:
- prohibit auditing firms offering any consulting services (although, I will say, as a "client" there are times when it is highly beneficial to get advice from our auditors, because we have a relationship with them and they know us, our situation and our history, so perhaps we should put some form of value or percentage limit rather than an absolute ban)?
- have a mandatory "X" years rotation requirement (3 or 5 years)?
- prevent any ownership cross-holding by owners of the audit firm of consulting firms (and vice versa), and connected parties, and all forms of ownership structures intended to circumvent such rules, including opaque foreign ownership structures?
....I will say, as a "client" there are times when it is highly beneficial to get advice from our auditors, because we have a relationship with them and they know us, our situation and our history...
Of course it is comforting to deal with someone you know, and you do build up personal relationships as the years roll by, and of course the auditors get to know you, and mutual trust develops......
And that is why the current system has failed. All those reasons for snuggling up to the audit firm, and using them to do other things, are the cause of the current mischief. Because that comforting, personal, mutual understanding and trust is actually the crack through which the malfeasance eventually squeezes in.
A good auditor should be cordially detested by the people being audited. It should go with the territory. Just like non-executive directors who the MD can't wait to get rid of because of all the pesky challenging questions they ask, the auditor should be seen as a ruddy nuisance. If that's not the case, the auditor isn't doing their job properly.
The main problem with the ‘big 4’ is that the toothless FRC does nothing to properly monitor them or punish them for their continuous breaches of audit regulations not least conflict of interest etc etc
Maybe labour could be the regulator? I would like to be a fly on the wall at the meetings between momentum and the chief partners at PWC!
The HBOS Carillion etc audit reporting failures pale into insignificance compared with the dodgy bank audits they performed in Latvia (Parex), Ukraine (Privatbank) and the like. Take a look at last week's "Private Eye" (#1478) for some real mutli-million shockers.
Part of the problem is that the auditing company doesn't want to rock the boat because their client is paying the fees, and won't re-hire the auditors if the audit shows them up.
One-year enforced client rotation could solve this as there would be little (or less) incentive to cover stuff up.
Definition of an auditor:
Those that go round after the battle bayoneting the wounded.
Never understood why I have to pay for an audit when as a Director I have to sign a letter absolving the auditors of any responsibility.
My experience is that these auditors send in the juniors to do the work and pocket their partner fees.
First up against the wall in the revolution.
We need to reverse the test. The rise of consultancy was because this was an add on to the captive audience that auditors had. The balance has changed. We should now be able to regulate the big 4 as consultancy firms, and debar them from taking on audit work for their consultancy clients