Big Four audit conflicts
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.