According to the FT:
KPMG has been sternly rebuked by the UK accounting watchdog for an “unacceptable deterioration” in the quality of audit work it performs for Britain's largest publicly traded companies.
According to the FRC, which is itself under heavy pressure to demonstrate a tougher approach to monitoring the audit market, half of KPMG's audits of FTSE 350 clients required “more than limited improvements”.
Let's be clear: the Financial Reporting Council, which is itself fighting for its own survival, may be scapegoating KPMG. But it looks unlikely. There have been far too many KPMG client failures to think they are mere coincidence.
I am completely unconvinced by the Financial Reporting Council's new zeal.
I am utterly unconvinced that PWC, EY and Deloitte are that much better than KPMG.
But I am quite sure that there is something seriously wrong with audit.
What is that something wrong? It is the fact that in essence these four firms don't just control the profession and the whole large audit market. They also control the regulator. And they control the accounting and auditing standard setting processes so that financial statements no longer meet most user needs and the chance of suing an auditor has been reduced to the point of being negligible.
The Financial Reporting Council has been complicit in this capturing of public standards for private gain. But now, with their backs to the wall even they can't ignore what is happening any more.
There's something very rotten in the state of accounting, and let's not just pretend it is KPMG's audits, however bad they are. The problem is much deeper than that.
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The rules should change to disallow an auditor from consulting, and to disallow an accountant to audit over a certain size of business turnover. Split the companies up so that we have 6 or more national auditors.
How many times! Those are already the rules. Non-audit Services (Consulting) are capped and restricted for audit clients.
Anything remotely related to book-keeping, management decisions, financial IT systems, HR decisions and many others are all blocked and not allowed while a firm is an auditor and in the cooling in and out periods.
For all services that are permissable there is a strict fee cap of at least 3:1 so that audit fees are always greater than any permissable consultancy work.
It amazes me how much you people criticise (which is fair) but get your facts wrong so many times.
Is that big 4 clone?
Sure we know about the block
But when there are only four firms they all supply services to each o9thers clients
And that means there is no market at all
And even the cap makes everything very chummy
There are vastly more than four consulting firms to choose from.
And spoken truely like someone who doesn’t know how competitive it gets in the “big 4”
Not sure how the cap makes things chummy either. The allegation is audit firms ignore failings so they can keep bigger non-audit fees. That is patently false as demonstrated by the fact there’s a cap.
There are other consultancies
But none do much of what the Big 4 do in the same way – I am doing research showing that
And the supposed competition? Oh come on: even they admit they are an oligopoly
You will be deleted as a troll now
Interested to hear what it is you think the big4 do that the likes of Bain, Booze, McKinsey, Accenture, ATOS, IBM don’t do. (Consulting wise (not tax/audit)?
And yes oligopoly in auditing – doesn’t mean one exists in consulting where it is an extremely competitive environment.
Not sure how anything I’ve put can be misconstrued as trolling – I’ve tried to add insights based on my understanding of working in a big4 without getting personal. If that’s trolling – well – how odd.
To me looks more like shutting down debate when someone goes opposite to the prevailing mood. I’d have thought the commenteriat would be interested in throwing their questions at someone “in the belly of the beast” so to speak!
Astroturfing with commercial interest under a false name is not trolling?
If you want to be taken seriously put your cards face up on the table
Or we know you’re not just a troll but part of the opacity industry that only exists to facilitate abuse
If you have things to say do so – but say who you are
I speak as a free agent with no guidance or approval of any big4 PR department so not sure that’s astroturfing or promoting the party line.
I value pseudoanonymity but use the same name comment wise for sake of tracking what I say (instead of just putting Anon). Plus I’m not exactly speaking on the record.
As mentioned in my other reply about how we could reform audit (physician heal thyself) which doesn’t seem to have been accepted yet – I am manager grade working in a big4 on the consultancy side of the business.
I specialise in forensic technology and predominantly work with law enforcement and other agencies as well as some commercial clients. 6 years experience of being in a big4 now. Mostly positive for me.
Interested in the debate and public perception of the firms as well as wanting to dispel a few myths – but I speak/debate in a private capacity not as a representative and welcome any questions or challenges.
I’m sorry – but this feels like PR
That’s your last contribution as a result
this was always going to be an issue when they were allowed to merge. it shouldn’t have been allowed they should have a special status that requires them to be maintained as different companies enables choice and enables flexibility. the banks are a in the same situation.
Except the banks aren’t are they?
-RBS owns NatWest and Services Tesco
-Lloyds owns Halifax and BoS + some of Sainsburys Bank
-HSBC is well HSBC
-Barclays is Barclays
Virgin now own CBYG (acronym?)
Looks like four or five to me? And I’ve yet to see mandatory rotation of current accounts…. hypocrisy at its finest.
Feel free to criticise banks and to criticise the big4 but equating is nonsense.
And while you do criticise – the big4 employee approx 50,000 in the UK and the banks countless knows how many. While you cheer said firms going bust and being broken up on. You’re also cheering on even more damage to the economy and even more people’s jobs in jeopardy. (And while you may go ha they deserve it only 0.04% of big 4 staff are the partners you lambast)
“Feel free to criticise banks and to criticise the big4”.
“It amazes me how much you people criticise (which is fair)”: that is because there is so much to criticise, fairly.
The ‘system’ in both cases (banks and auditing) doesn’t work. Regulation has failed, in both cases. There requires to be fundamental change. Perhaps you would care to offer a system that will work in auditing (you see, in fairness lets leave banking out of it), rather than special pleading for the frankly indefensible? You appear to set yourself up as an expert on this; so physician, heal auditing. Provide a convincing case.
Well, thanks at least for trying. I think if you come back to what you wrote, and look at it objectively (like a consultant?), you will see that it is a fairly damning indictment of the status quo. At the same time it is filled with the special pleading of an insider, and frankly is constructed to salvage much of what exists; including a sense of self-regulatory wisdom (that is simply unsustainable).
It will not do. Perhaps you have, for the first time (?), caught a glimpse of the world as seen from the other side of the the table from the know-it-all consultant. Perhaps that is cruel, but I could not avoid noticing your use of a pseudonym; I understand and sympathise, if you felt you could not write this without one; but if that is the reason for the pseudonym, that in itself tells a story.
One final point. Most professions attract people for a variety of reasons; but some professions often they draw people to the profession who are naturally conventional, conservative, status-aware and status seeking, and in a narrow sense, ambitious; naturally hierarchical and most comfortable ‘fitting in’ to a comfortable, socally well-regarded, safe and secure environment.
Notice that I did not place ‘independence of mind’, or ‘imagination’, or ‘inventiveness’ on the list. That is because, in my experience, in your profession I found them a rarity. I would not typically approach an accountant or ‘consultant’ for “innovation” (Richard is, in my view – a rarity); save perhaps authoritative knowledge and even ingenuity in succesfully negotiating and interpreting the ‘rules’ for clients.
Please forgive my candour.
I don’t claim to be an expert – infact far from it with regards to audit, I sit on the consulting side of a big four – many miles below partner (so no vested interested on that front). I do however see the good work my colleagues do Day in day out and the damage to morale everyone is (arguable rightly as their have been serious mistakes) is feeling.
I think there are a few fundamental issues, how we solve them I’m not sure but I’ll take a stab.
1) No one knows what an audit does – even I until recently assumed it was the same as accounting and this is someone working in a large audit firm! – I would ask FRC or other interested body (ICAEW?) to implement some education campaign.
2) perception of Consulting vs Audit bias – while I think this is unfair due to the cap – if we want to really get rid of this – ban any consultancy with any audit client even if the services are very unrelated. Most of the time truth be told the consultancy side doesn’t work with audit clients anyway (too much hassle/paperwork and audit committees don’t like it) – something you probably won’t hear often but I’m being honest.
3) Reform and monitor audit committees – they are the ones that hire big4 or others – make them more robust, improve corporate governance of these and stop them filled with uninterested NED’s who just choose a big4 because of the name.
4) Consider completely changing who pays for an audit and how they are tendered. There’s a perception that to keep the money rolling in auditors keep the company sweet (ignore findings) while I don’t think that’s true at all – consider large companies FTSE350+ having to pay an “audit tax” this money goes into special pot and then NAO or DBIS runs competitive tender for audit suppliers and allocates pot of tax money as fees. This breaks the direct link between purchased and auditor.
5) I don’t think any in the big4 would have an issue with dual-audits like in many European countries, so maybe pair up each big4 with a smaller firm during the tender process and state bids must be joint. The downside of this is clients would have to accept fees going up. But you would get increased scrutiny / cross – training of skills etc which would be good.
6) More transparency – I’d wager most people don’t know they amount of pre-work conflict checking that goes on in the big4 so let’s open it up and explain to dispel myths that it’s just old guys in suits handing each other bags of cash.
Things like how every client facing member of staffs personal finances are scrutinised (not just auditors). How before you can talk (not contract – just talk) to a client about a new “service” you have to go and get a conflict check (and if there an audit client – audit partner approval – and in some cases audit committee approval). Once that’s done you have to do client acceptance checks – are they money launderers, who owns the company etc and finally you have to fill in a service questionnaire covering all the risks of doing that particular service – are we conflicted, is it in the public interest, are you handing personal dats etc – this is reviewed by between 3-5 senior people and sometimes external regulators to ensure its correct. Finally show the world the amount of training staff do annually on things like financial crime, conflicts, new laws like GDPR etc – which are mandatory for everyone.
7) Regulators and others need to be stricter on audit – despite perception the audit side of the business is usually under a lot less “risk pressure” than the consulting side. I would change this. For some work I do when a partner/Director signs the work their name is on the line the results of which is being forced out if it’s wrong (I’ve seen 3-4 partners go because of failings so even they’re not immune). Regulators and the firms themself should stop treating audit as a low risk, low scrutiny activity just because firms have done if for 100+ years. More oversight and if an audit is fundamentally judged to be wrong then the person who signed it (usually audit partner) gets removed from the partnership. (Not as hard to do as perception would have people believe). Also a clear and transparent fine system applicable to all players perhaps based on number of qualified accountants in the firm would increase trust and transparency.
These are just some ideas I’ve considered. I’m sure there are many more.
Do I think everything’s perfect far from it. I’m just as annoyed that the people I work with are constantly being accused of being corrupt, lazy, self-serving incompetents when it’s really far from the truth.
Do I think breaking up audit/consultancy is a good idea – probably not personally, due to reasons espoused elsewhere of skills swapping in highly technical areas such as pensions or IT systems.
Maybe some of the things I’ve mentioned above might help shake things up.
Most of us are actually quite open to figuring out how to make this all work, and we don’t claim to have all the answers. But “smash up” – “down with the big4” etc doesn’t really help the 50,000 odd people who are trying to do a good job for clients and communities.
Hopefully this also demonstrates I’m not trolling just trying to engage in honest debate.
I posted this despite your troll8ng
And I note you wholly miss the points I have made on accounting and auditing standards or oligopoly and instead go to some length in describing how lipstick is applied to the pig.
Sorry, but I pity your consulting clients if this depth of analysis is what you have to offer. What do you consult on? Spin?
Bit of a personal attack at the end there.
I think I suggested a few ways in which reform could be fostered that are more than just window dressing. If you disagree that’s ok.
Oligopoly in audit is a problem, I disagree with braking up big4 to 8 as a solution, joint audits so for example PWC and UHY joint audit might work.
Accounting standards I can’t speek about much. I agree they should be made impartially. I would’ve thiught gov.uk would have a hand in setting them? While it’s important to consult SME’s they shouldn’t be the only ones setting the standards. Academics such as Atul Shah and Prem Sikka should contribute too.
I’ll ignore the last bit since most of my clients are pretty happy with what I provide and it’s helped obtain a number of convictions – but as mentioned forensic technology.
I’m sorry you think I’m spinning or doing PR when I’m just commenting personal ideas (yes biased or influcend by my own experiences) but personal none the less.
I suspect this comes from the annual review of the biggest 6 audit firms which is due to be released tomorrow. (Has someone broken the press embargo?)
Therefore we will all be able to see how the others did tomorrow.
I have seen it
The others are a bit better…
I guess it comes back down to FRC impossing the correct penalty on the audit firms to improve behaviour.
Regarding FRC, as a layman even I am not convinced they are proactive enough.
For example do you know if they have a process for reviewing the unusual circumstance of an auditor resigning from an audit. Does their process do the minimum you would expect of them I.e. do they review the resignation letter to see if there is something they should act upon?
Why as a country do we rely on self-regulation so much?
I think it is much more than the FRC imposing the right penalties
The FRC is also the Uk accounting standard setter and accounting standards are now gibberish that few outside accounting firms understand, but which they demand that their clients’ sign as they are ‘true and fair’ despite that
I have said it before, but think it worth repeating, that if an accountant has to ask a client to sign accounts they have little chance of really understanding there is something wrong with the accounts and the standards that drive them
The Financial Reporting Council is better than nothing.
Can you imagine an audit by an unregulated firm, making up its on rules with no oversight, no disciplinary fall back, no safeguards, no risk of penalties if the audit subsequently was found to be wrong. Maybe the Big 4 would like to operate in that fashion but it would surely mean that any audit report in such a set up would be utterly worthless?