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‘Big Four’ accountancy giants face UK probe
LONDON, Nov 23, 2018 (BSS/AFP) – Almost two decades after the collapse of
US giant Enron in a notorious accounting scandal, the accountancy sector is
back in the spotlight, this time thanks to a string of scandals in Britain.
The sector’s so-called “Big Four” — Deloitte, EY, KPMG and PwC — have a
long-established oligopoly to advise and monitor big business, experts say.
The powerful companies engage in a wide range of activities, from accounts
auditing and strategy consulting to proposed mergers and acquisitions,
restructuring and taxation.
However, a series of high-profile corporate collapses in Britain —
including retail giant BHS in 2016 and construction company Carillion in
early 2018 — have put them into the crosshairs of the authorities.
The Competition and Markets Authority watchdog launched a sector review in
October and is expected to report back before Christmas.
– Firms need them –
Despite the controversy, firms feel they need one of the Big Four on their
side as investors usually want to see their labels when they scrutinize the
quality of companies.
“Firms need to placate financial markets and having a ‘Big Four’ badge is
one easy way to do this,” Professor Crawford Spence at King’s College London
told AFP. “These symbolic aspects are very important.”
The Big Four audit all but one of the 100 companies listed on London’s
benchmark FTSE 100 stocks index, media reports say.
“This is partly explained by the need for big listed companies to have an
auditor with an international network who can deal with subsidiaries
overseas, partly with issues to do with brand,” added Spence.
“The Big Four … pride themselves on trying to understand the whole
business of a client, not just its audit issues. This ’rounded business
knowledge’ is very useful for big clients.”
Yet the sector has seen its reputation tarnished in recent years, despite
changes enacted since Enron’s collapse in 2001, which experts say was
probably the world’s biggest accountancy scandal ever.
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The Financial Reporting Council, which oversees the industry, fined PwC a
record o6.5 million in June over auditing failures of BHS, two years prior to
its collapse.
– ‘Toothless’ –
KPMG meanwhile faces a FRC probe over its audit work for construction
group Carillion, which went bust in January, amid concerns it may have
breached ethical and technical standards.
The FRC — which stands accused by a British parliamentary committee of
being “toothless” — has also proposed a series of reforms for the troubled
sector.
They include a possible ban on accountancy groups earning lucrative
consultancy fees from companies that they also audit.
However, Professor Spence argued this would fail to address the broader
issues — adding that the quality of audits must instead be improved.
“The key issue here is auditor independence. As long as management
appoints and pays for auditors themselves, the same conflicts of interest
will keep resurfacing.
“What is needed are auditors to be appointed by panels of shareholders or
other stakeholders.”
He added: “Competition is a red herring here. If you look at other
countries where they have tried to do something about Big Four monopolies,
the effects have not been particularly inspirational.
– ‘Perverse effects’ –
“In France, the state forced companies to appoint joint auditors – this
had the perverse effect of increasing the concentration of the audit market
even further.”
The Big Four also have more than 95 percent of FTSE 350 businesses on
their books.
In reaction to their strong grip, Grant Thornton — Britain’s fifth
biggest accountancy firm — announced in March that it would stop bidding for
new auditing contracts as it could not compete.
Yet Grant Thornton itself has also found itself at the centre of
controversy.
The FRC this week announced a probe into its audits of British cafe chain
Patisserie Valerie, a client of Grant Thornton, which came close to collapse
last month after uncovering a black hole in its accounts.
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