The Big Four accountancy firms can’t be relied on to audit the world’s top companies. The focus on consultancy and lack of liability have created systemic issues that require major reform, according to investigative reporter Richard Brooks’ new book.
The strapline of Bean Counters reads “the triumphs of the accountants and how they broke capitalism”. Beyond the combative summary, Brooks tells the history of accounting and how the auditing profession has been undermined.
Why a tax inspector took a job at Private Eye
Brooks started his career as a tax inspector reaching what he describes as a “fairly senior” post in the civil service.
“There was a lot of weird and wonderful stuff going on at the time,” he told AccountingWEB in a call from the publisher’s office. “I thought I could do more as a journalist than a tax inspector.”
Brooks doesn't describe himself as a whistle blower, rather he was joining the dots with publicly available information. The first story was about HMRC selling its offices to a company based in Bermuda, a move it defended with by referencing advice from Deloitte.
That was the early noughties. The idea for this book’s been developing since the Big Four’s role in the recession.
“Books were written on the problems at the Big Four in the 90s, even before Enron. They got a spotlight in the scandals around the turn of the century. Then you had the financial crisis,” Brooks says.
The timing of the book is prescient. Auditors have again come under fire in the wake of Carillion's collapse - the Big Four charged £71.6m for work relating to the company in the ten years leading up to its collapse.
Consultancy work undermined the audit function
Brook's believes the problems started with accountancy firms’ increasing focus on consultancy. More than half of their turnover was from consultancy work by the mid-90s and it would continue growing, impacting their priorities.
The concern has historical precedent. Arthur Andersen started offering consultancy in the 20s. PricewaterhouseCoopers refused to go down the same route in that era to prevent its ability to audit effectively being compromised.
“Andersen thought there was a conflict, but that it could be managed. He was quite ruthless in enforcing his auditing standards but you aren't always going to have people like him in charge,” says Brooks.
He cites KPMG’s work on HBOS as a classic example - “they earned tens of millions of pounds of consultancy while doing what looked like flaky audits”. Its accounts were published barely six months before the bank failed.
The Parliamentary Commission on Banking Standards’ report on HBOS’ collapse was called: ‘An accident waiting to happen’: The failure of HBOS. Yet regulators concluded the accountancy firm could not have foreseen the bank’s problems, a decision which drew criticism.
“It gets onto a bigger point about how you see yourself as a firm. If you see yourself as an all-encompassing professional services firm, you don't see yourself as an auditor in the same way.
“The current setup encourages a fairly low level of investment in audit, which is obligatory. They’ve captured that market. There’s no immediate cost to not doing that job properly,” he adds.
Brooks refutes the argument that offering these companies consultancy improves the firms’ knowledge of the business and, therefore, the quality of the audit. Arguing it isn’t in consultants’ interest to speak ill of products that they have helped develop or risk damaging their relationship with the client.
“Auditors have an important job with a big responsibility. They need to take it incredibly seriously,” says Brooks. “They need to have that in the back of their mind when the going gets tough. When senior partners are getting pressure from the chief executive of a big client. They need to remember their priority is getting the numbers right. They need that kind of backbone.”
Reforming the auditing industry
Brooks argues the issues are systemic and require reform. Large providers of public services, and banks that are systemic and economically important shouldn’t be audited for profit because it creates perverse incentives. The Big Four should steer clear of secret jurisdictions and tax havens, and increase the level of detail they have to report in their financial filings. Finally, he suggests looking at the level of liability these firms have, which has been impacted by a series of legal challenges and LLP status.
“They are not sufficiently risk averse,” argues Brooks. “They’re not sufficiently afraid of the consequences of legal action. That's a good discipline and they don't have enough of it.”
And what about you, dear reader? What does Brooks want to tell the auditors that read AccountingWEB?
“They should all read the book!” he starts jokingly. “One of the things I was keen to do in the book was set out the history of the profession. I know I slagged it off but of course a lot of accountants do incredible jobs.
“If they realised how important what they do is it would really boost the profession and the standard of auditing. If when they were confronted by an awkward client they were proud to say; ‘I'm an auditor, my jobs to get things right, so you're going to have to listen to me.’”
About Chris Goodfellow
Journalist and editor with eight years' experience covering politics and business. His work has been featured in a range of publications including The Guardian, The Financial Times, The Independent, the BBC and Vice magazine.