The Big Four are failing their auditing responsibilities and need to be reformed

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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

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.

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15th Jun 2018 11:02

The failure is not in the work they do, it is that they have allowed the definition of Audit Function to grow out of all proportion.
Audit remains what it ever was, a "Test-check" that systems are working.
Sadly under much pressure from those who would avoid their responsibilty, the Big Four have by default allowed those concerned to dream on. The Four have therefore without any malice aforethought become accomplices in a comforting fairy story.
An "independant auditor" will never know enough about his client Mega International PLC to be able to provide the assurances that "Outraged from Sevenoaks" erroneously thinks he should provide.
To do this the auditor would probably have to work full-time in the mega PLC for 20 years in order to learn all its workings.
Catch-22, inevitably the auditor will thereby compromise his "Independence".
The big four, regrettably, are not prepared to emphasise the concept of "Test-check", instead they sometimes appear to hold out that they are Sherlock Holmes and the Oracle at Delphi, combined.
-Yes, I know that the oracle was known for uttering prophecies with dual meanings-
This means that you may regulate until elephants turn pink and pigs fly, but except and unless Directors, investors, HM Government et al, and the auditors concerned truly accept this inconvenient truth, Sh*t will increasingly happen.
It will increasingly happen because we have been beguiled by the word "Computer".
Unfortunately we have recently painfully learned that although Computer is a wonderful amazing tool, it remains "Just" a tool. It may be used for good or for evil.
The first original truth remains very much the truth.
Garbage in = Garbage out.

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By ShayaG
to David Gordon FCCA
15th Jun 2018 14:52

(a) In almost all audit failures (enron etc.) the material issues were known to the auditor and the failure came down to a lack of moral fibre on the senior statutory auditor's part rather than a technical or systemic issue.

(b) what you are arguing for is for the audit report to be formally declared entirely useless in meeting the needs of investors. If auditors can't be relevant they should cease to exist, rather than turgidly ticking pointless boxes.

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15th Jun 2018 11:23

Simple answer - Nationalise the auditors. Then all you worry about is the corruption of low-paid disgruntled civil servants who would soon leave anyway to join the profitable world of consultancy with the Big Four.

I doubt if the reason is anything to do with conflict of interest, more about incompetence - noone in the audit team has seen the wood from the trees. You would hope the audit partner had that overview, but the pressure of time deadlines means that most audit procedures fall to fire fighting rather than fire prevention. The basic concepts of existence and value of the whole entity rarely get considered since aspect that has been applied at the transaction level. Hot reviews can never bring much up if all the myriad audit tests, controls and balances have been done but ask the audit partner how much would he pay for a 100% holding and the answer will rarely match the balance sheet value. Perhaps the answer is to stop going concern and start liquidation basis - but watch the City howl as the stock market collapses. Better to maintain the illusion of wealth than look at the holes in the soles.

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By ShayaG
to BlueNose1812
15th Jun 2018 14:49

How will this new national audit service be funded?

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to ShayaG
15th Jun 2018 15:25

Number of limited companies = 1m. Number of auditors = 100k x salary £30k = £3b / 1m = £3000 Annual Confirmation Statement filing fee. That's how nationalisation works. We all pay our bit for now. I'm sure the Big Four consultants will soon start selling Annual Confirmation Statement Avoidance Schemes for £1.5k.

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By ShayaG
to BlueNose1812
18th Jun 2018 12:29

Right, but the vast majority of those 1m companies are audit exempt?

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to ShayaG
18th Jun 2018 12:45

But not annual filing fee exempt. Look you asked for how they could be funded - don't take my answer too literally, or seriously. Post Brexit they could always reduced the exemption limit to the good ol days when all companies were "audited" - how else does a nationalised institution create work for itself. It would have the added bonus of regenerating the self-employed ranks who could then be hit a couple of years later with Class 1 ER NIC - 13.8% on all drawings !!! When you live in the world of social media any crackpot tax scheme can soon catch on.

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15th Jun 2018 12:37

Auditors need a green sticker like restaurant's have, from 5 star very clean to 1 star rats in the kitchen.

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to SJH-ADVDIPMA
16th Jun 2018 13:59

I believe there's a "Fair Tax Mark" being awarded on a similar basis.
OK tax isn't everything, but a set of executives who will massage that should be a big amber light to other stakeholders...

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15th Jun 2018 12:41

It makes me laugh when one of the big boys gets into trouble over lousy audit work. A spokesman for the firm then says 'regrettably this fell short of our normally high standards' What, every bloody week?

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By tedbuck
15th Jun 2018 13:05

The problem is simple. Most large Companies cannot be sufficiently understood by people visiting the office for an annual audit. So the audit is carried out by the book - i.e test checks are made to prove the records are correct. This will rarely improve the auditor's understanding of what is going on especially if the client's staff is hiding a problem from view.
So, basically, I agree that expectations are too high, but I also feel that a change in method is overdue.
We have files independently reviewed which is usually an exercise in ticking boxes but to my eyes proves absolutely nothing except that there are a lot of people about with make-believe jobs creating work for themselves. Did I hear someone say GDPR?

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By ShayaG
to tedbuck
15th Jun 2018 14:55

I cannot name one high profile audit failure caused by insufficient understanding of the client. Auditors understood exactly what was going on in Enron - they just lacked the guts to qualify. The same with Tescos. I can name plenty caused by the conflict of interest inherent to management buying an independent opinion.

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By ShayaG
to tedbuck
15th Jun 2018 14:58
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By ShayaG
to tedbuck
15th Jun 2018 14:57
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14th Sep 2018 16:32

To be fair the Accounting and Auditing profession got away with murder during the 20008 financial crisis, the cost of the clean up was met by the Government, however this will not happen again as the UK debt is to high already, it could not suffer an additional 1 trillion on top of it, the debts would become un-sustainable.
If there is another Financial crisis I believe there will be a different outcome, or would there as if threatened members of the big 4 would chose to fold or go into administration (or something similar) and let others again clean up the mess.

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