The latest shenanigans involving the Big Four audit firms have prompted a former, longstanding member of the US Public Company Accounting Oversight Board to join the debate over what should/can be done about these groups’ increasingly unpleasant grip on the market.
Rarely a day goes by when there isn’t a headline about an alleged blunder or ‘misunderstanding’ or investigation involving EY, Deloitte, PwC or KPMG.
Steve Harris, who served on the board from 20019-18, says: “The auditing profession plays a vital role in maintaining the integrity of the world’s capital markets, but recent audit failures are renewing doubts about whether the world’s largest accounting firms are truly serving the public interest.”
Failure to detect a criminal fraud
His comments come after a US judge this week ordered PwC to pay damages of $625 million after an alleged failure to detect a criminal fraud that led to the failure of Colonial Bank. PwC says it will appeal.
The Big Four firms are under scrutiny in the UK especially after the failure of Carillion. That looks set to cost taxpayers about £148 million. Some MPs have called on the competition watchdog to orchestrate the break up of the four to separate audit from consulting and tax work. Scandals in India and South Africa further muddy the picture of the big-time audit profession.
Harris, writing in the FT, says: “Although the firms have a public obligation to produce independent audits, they are paid by the companies they inspect, making them vulnerable to management pressure and bias. Today’s Big Four are not just accounting firms. Instead, they offer a wide variety of consulting and advisory services under one umbrella, including investment banking, asset management, legal services, cyber security, personnel recruitment, advertising and marketing campaigns. These services have become a lucrative line of business for the Big Four, bringing in large annual revenue increases.”
Bolster investor trust
He asks: “So what can be done to improve audit quality and bolster investor trust?
“Suggestions over the years have included replacing the inherently conflicted issuer-pay model, creating audit-only firms, breaking up the groups to ensure greater competition and forcing companies to change auditors regularly.
Suggested measures to deal with the problems include:
- Watchdogs forcing the largest audit firms to produce their own publicly available audited financial statements. This would aid transparency and help to monitor their activities.
- Non-audit activities should be limited to services that are either closely related to or incidental to auditing.
- Regulators should tighten the independence and conflict of interest rules to prevent cross-marketing and anti-competitive behaviour.
- Policymakers should insure that audit regulators are independent of the profession to avoid the growing threat of regulatory capture.
- Regulators could create the equivalent of a Hippocratic oath that would require all auditors, including firm leaders, to attest that the investing public, not company managers, are their primary clients.
- Auditors should affirm that they have a duty to assess whether a company will struggle to stay afloat, and tell the public if they have concerns.
Harris adds: “The Colonial and Carillion cases should serve as a wake-up call to strengthen regulation and reshape the culture of the auditing profession. It is time to act lest we repeat the accounting scandals of the past.”
I can’t help but feel that this subject is going nowhere, slowly, But I wish it weren’t.