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Big Four audit conflicts

14th Nov 2018
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Regular readers will have devoured an article yesterday by Mark Taylor in which he gave his views on the recent announcements by KPMG and Deloitte that they will no longer carry out non-audit work for audit clients. Philip Fisher analyses what this means. 

One needs to go little further into the detail to discover that this will only apply to FTSE 350 and large unlisted public interest entity audit clients.

We must all applaud a decision that should help make the profession look a little more respectable, given recent high-profile disasters such as Carillion. Some might suggest that this should have happened years ago as the perception of conflict-of-interest has long been a hot potato.

In many ways, these announcements represent a sad indictment of the depths to which outsiders’ views of the accounting profession have fallen.

In principle, it is hard to see why there should be any problem with a firm providing a wide range of services to a single client. However, that assumes every accountant upholds the highest ethical standards and would never be influenced by the possibility of losing fees should a client’s whims not be humoured. Apparently, such assumptions are not necessarily valid anymore.

Going further, one struggles to imagine that many readers who work in practice would even consider restricting their offering to a single service, especially when that is far from the lucrative practice of auditing.

Every one of us knows that compliance work is generally an unprofitable grudge buy, which means that the money to pay for our mansions, yachts and Rolls-Royces has to be generated through consultancy services.

Going a step further, given the difficulty in attracting clients, most of us would blanche at the thought of having to generate two different sets of clients: those requiring audit services and the profitable ones.

Going back to the Big Four and their stranglehold over the largest listed companies in this country and for that matter the world, these announcements are likely to have grave consequences, at least at a headline level.

To start with, we will have to see whether PwC and EY follow suit. If not, that pair will have an incredible competitive advantage and might even manage to reduce the Big Four into a duopoly in no time at all.

Realistically, they will almost certainly feel obliged to go down the same road, swiftly followed by the next tier down. However, this does beg a question about whether anyone can find a rationale for the proposition that rules which are necessary to avoid conflict-of-interest in major groups should not apply to any company big enough to require an audit. Such an extension should, therefore, be the inevitable next step.

In practice, one would imagine that once the biggest firms in the land pull out of either audits or other work for each client to whom this new protocol will apply, the only firms to benefit will be their equally large peers.

It will be interesting to see whether there are formal (if well hidden) agreements to swap work around between two or more members of the Big Four, thus protecting their collective position.

Should that be the case, then there might be new vested interests that could lead to questions, since those carrying out audits as a quid pro quo for others who regularly scratch their backs might be just as conflicted as they are under the current scenario.

Replies (5)

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By paddy55
16th Nov 2018 11:58

I was under the impression that the Big 4 ceased combining audit with other services after the Endron affair but they started up a few later combining audit with other services. It now seems the wheel has turned further and they have again stopped combining audit with other services.

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By richardterhorst
16th Nov 2018 11:58

So they are giving up a HUGE chunk of income?

Call me a cynic but I just do not believe it.

Yes they will "distance" themsleves from it with some complicated structure but giving it up? Never!

Ernst and Young now meddling in software with a new offerring to SME's and SME accountants. MTD has them all ambulance chasing.

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By tedbuck
16th Nov 2018 12:30

Did anyone read Private Eye a while back on the subject of large firms helping to move Russian Dirty Money into the UK by, of course, legitimate means?

Having waded through that article I could never again believe in the integrity of large firms or those supposedly watching over them, so, obviously, I would expect a way around the problem to be found.

The real answer is for a totally independent audit body to be established so that no question arises as to undue influence. How it would work at the lower end of the market I really don't know but it might get rid of an awful lot of unprofitable work at all levels. Perhaps the audit exemption levels could be extended. It doesn't seem a very effective process anyway judging by the efforts of the Big four on large Companies.

Perhaps I am just cynical!

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By PChapman
16th Nov 2018 13:34

Accountant A stops auditing client 1, recommends Accountant B. Accountant A continues providing Non Audit Services to client 1
Accountant B stops auditing client 2, recommends Accountant A, Accountant B continues providing Non Audit services to client 2

Accountant A and B go and play golf and congratulate each other on the acquisition of each new Audit client
Accountant A and B feel smug that they've dealt with the apparent conflict of interest without any new regulator nosing in to their business

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By pepegracia
28th Dec 2018 14:58

Me parece todo un acierto por parte del editor un gran artículo , muchas gracias

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