The FT has reported overnight that:
The Big Four accountancy firms have drawn up contingency plans for a break up of their UK businesses, an option politicians and regulators are increasingly pushing to solve conflicts of interest embedded in the industry.
The pressure on the four firms that dominate the sector – KPMG, Deloitte, EY and PwC – to prepare for a forced break-up has increased following high-profile corporate collapses that have called into question the quality of their work as both auditors and consultants for the UK's largest companies.
I won't be celebrating as yet. That would be premature. But as one of a quite small group that has campaigned for this outcome for a long time - in which Prof Prem Sikka has played the largest part - even seeing such news reported is welcome.
As the report goes on to note, these firms admit that they are an oligopoly and there is a hint that they think themselves unsustainable in their current form.
What I would add is that they are not sustainable as four audit firms either if the current relationship between auditors and client is retained, the current regulators remain in place and the current accounting framework persists. I am doing a presentation on these issues in Dublin next week - which could not be more timely. I worked on this yesterday and will publish it when it has been delivered.
Suffice to say now that I do not suggest that a simple break up of the Big 4 will do. Nothing less than root and branch reform of accounting will do that now. Having independent auditors commenting on data that will still only be designed to meet the needs of a tiny minority of the stakeholders of the world's companies will not solve the crisis in accounting: much more radical reform is required to address that. But as I say, more on that next week.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Driving examiners aren’t chosen by their students, football teams don’t decide who referees them, so why do we persist with auditors chosen by those who they audit? Once we address this the rest becomes a lot clearer.
Agreed
I don’t get why these spin off contingency plans are suddenly evidence that the big 4 might break up. The FRC require the firms to have these plans in case of some catastrophic event and have done for years. This is not news!
It is
They’re talking about it
That is news
News by definition is supposed to be “new”. This isn’t!
Only by your distorted measure
It seems to me that the ‘audit function’ and all other accountancy services should be separated by statute. To allow an auditor to offer other accountancy services seems to me profoundly unsatisfactory. Any other solution than the complete separation of audit services from other accountancy/tax services seems to me an invitation to invite the re-introduction of these tired old words into our vocabulary with fresh impetus (which I hoped might finally be expunged from all civilised discussion altogether).
I mean the term “Chinese walls”. I discovered long ago that there were more Chinese walls in the Square Mile than anywhere on earth. You cannot see them, you cannot touch them and there is no way of identifying them. They serve the same purpose as that most stubborn entity in 19th century physics nobody ever found: the “imponderable ether”. They gave up looking for it when Einstein showed up.
In this politically correct world they are called ethical walls these days
Respectfully, I would not be seeking guidance on ethics from you
Why not? You don’t even know who I am or what I stand for? You must be having a bad day as you aren’t normally this rude
I have noted your past comments
Well, we ended up with a Big Four almost by accident, when Arthur Andersen imploded. But the previous PwC merger (Six to Five) seemed like a mistake to me at the time.
We could start by simply divide each of the Big Four in half, to get back to the Big Eight we had until 1989:
* Deloitte becomes two separate firms – Deloitte, and Touche Ross – again
* EY becomes Ernst & Whinney and Arthur Young again
* KPMG becomes Peat Marwick and KMG again
* PwC could become Price Waterhouse and Coopers & Lybrand again
But would that solve the problem? There were still accounting scandals before the 1980s, and there will be again.
Can we actually do this, and make it stick?
I could say “the UK regulatory authorities, such as they are” and leave it at that; but there are legal, political, and practical barriers to a break-up of their UK operations, over and above the Big Four’s regulatory capture of HMRC.
Other agencies are heavily dependent on seconded staff for their day-to-day operations and, perhaps, for their strategic direction: all of them will advocate for their patrons and attempt to halt any genuine reform, or render it down into a façade of political ‘victory’ concealing an administrative sham.
Whose seconded staff and soon-to-be non-executive directors will administer and supervise the process?
Looking outward, is it realistic to believe that ‘break-up’ and ‘independent’ mean what you and I believe them to, within the territory of our inward-looking little island and its overseas dependendencies, when the international structures of the Big Four firms remain intact?
I agree that the Big Four need breaking-up, and I want to see accountancy and auditing become a genuine profession of independent practitioners who act courageously and ethically.
However, I do not believe that the United Kingdom can impose this on them; and a sham proclaimed as a success would be far worse than what we have today.
The reason for putting out my report on these firms again was to note their ability to shift firm almost at will. Of course they will try to do so. But have no doubt that action here would quickly lead to change elsewhere: there is considerable demand for this in the EU for example. I am quietly optimistic.
If the EU get behind us, then it will probably happen.
This presupposes ‘behind us’ – a will to do it, from within the UK.
A foreseeable outcome is the EU seeking to impose it on a ‘rule-taking’ junior partner in the UK’s post-Brexit trading arrangements; however appealing that may appear to be, it can only work with a UK regime that is genuinely committed to making it work.
A less-open and equivocal ‘Brexitstan’ regime will collaborate in concealment and obfuscation; given the nature of the problem, this approach would be even more effective than outright obstruction.
So the effective solutions really do start here, in an honest examination of the facts, and in campaigning to get public opinion and real political power behind the cause.
I hear you!