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Big Four need taming after EY demerger collapse

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News that EY has failed to demerge its audit practice from consultancy could have much wider implications for the profession, putting pressure on the authorities in the UK and beyond to take long-delayed action.

20th Apr 2023
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The Big Four sometimes bring to mind those periodic stories that the media loves regarding people who keep lions or other wild animals as domestic pets.

To start with, the cubs are cute and cuddly but, over time, these big beasts become completely uncontrollable.

The UK government has become so dependent on “consultants”, most of whom seem to be major firms of accountants, that many systems might collapse were they to be blacklisted for failed deliveries and poor performance, let alone incredible cost overruns.

Some might argue that there are further threats, since major accountancy practices have the ability to re-write tax legislation, collectively control their own activities and charge fees to government now counted in billions.

In addition, they have an almost complete monopoly on audits of FTSE 100 companies and most of those in the next 250 as well.

That would be all well and good, were we not bombarded with news about failed audits, leading to multimillion-pound fines and even legal settlements that stretch towards or into billions.

The regulators have clearly been cowed, to the point where the government has decided that the Financial Reporting Council (FRC) is not fit for purpose.

Audit and consultancy split

One of the most regular remedies to be proposed is a split between the audit and consultancy arms of all of the major firms. This may not be the universal panacea that everyone hopes, but should have some kind of a positive impact on bad audit decision-making, exemplified by yet another hefty fine for KPMG last week.

The news that EY was voluntarily attempting to break itself down across the globe must therefore have delighted those who were too timid to take action themselves. It therefore follows that the decision to reject this proposal earlier this month by the firm’s partners in the United States is a severe blow.

The reputation of our profession has suffered greatly from a stream of headlines informing the public that the leaders of our industry do not seem to be very good at their jobs.

Discovering that a potent solution has now been abandoned will disappoint the authorities and might leave them in an embarrassing position.

Not unreasonably, they should have been over the moon when EY decided to do their duty, with every prospect that, had that big demerger taken place, the other three members of their elite group would have followed suit relatively soon after.

Pride before a fall

Now, that seems very unlikely given that, if the rumours are correct, the EY project failed because the two parties could not agree who would benefit from the profits of the lucrative tax practice.

All logic suggests that this business should not have been anywhere near to audit, since the connection is regarded as dangerous. The problem is that the audit practice will not be nearly as profitable as consultancy and the audit partners might have very reasonable concerns about their bank balances without some kind of artificial stimulus from consultancy profits.

Regrettably, we must now expect that the status quo will hold for years if not decades, with audits consistently failing stakeholders, regular fines as a result, and the occasional disaster such as Enron or Carillion leading to yet more denunciations but no concrete action.

Clean up the profession

There is an alternative. That is for either politicians or regulators within the profession to take the bull by the horns (or the lion by the mane) and force through four demergers, helping to clean up the profession.

Even if that happens, there are still many more underlying problems but it would at least be a big step in the right direction.

It may be entirely coincidental (or it may not) but within days of announcing that the demerger had failed, EY in the United States declared that it was cutting 3,000 jobs. Some readers might conclude that, in effect, it is the staff rather than the partners who are footing the cost of the aborted project and its consequences. It was ever thus.

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By Hugo Fair
20th Apr 2023 18:55

"There is an alternative. That is for either politicians or regulators within the profession to take the bull by the horns (or the lion by the mane) and force through four demergers, helping to clean up the profession."

There's an even simpler, if harsher, alternative ... sanctions.

If they were only allowed to tender for Govt-funded projects when they have a clean (annual) bill of health - and every fine was accompanied by 'points' that progressively barred them from all but smaller & smaller projects ... you might find you'd got their attention!

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By Runagood Team
23rd Apr 2023 14:00

It strikes me that a solution could be that all audit required business pay their audit fees into a central fund that allocates the auditor randomly every three years. The outgoing auditor could not be reappointed until 2 cycles have elapsed. Not a total solution but it does stop the embedding problem.

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