Primary navigation:

QFINANCE Quick Links
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Blogs > Ian Fraser > 'Big Four' audit firms losing the plot over Barnier

'Big Four' audit firms losing the plot over Barnier

Accountancy | 'Big Four' audit firms losing the plot over Barnier Ian Fraser

The response of the “Big Four” accountancy firms to plans from EU internal markets commissioner Michel Barnier to shake up their oligopoly made me think of a quote from George Bernard Shaw; writing exactly a century ago in 1911, the great Irish playwright wrote that "All professions are conspiracies against the laity".

The giants of the accountancy industry thought they would be able to kick the reforms into touch during the consultation phase. But they failed, although they did succeed in getting one of the European Commission's proposed reforms removed. Since the reforms were published on November 30 (see: Restoring Confidence in Financial Statements) the "Big Four" have been dishing up disingenuous, self-serving and petty arguments against them.

Deloitte, Ernst & Young, KPMG and PWC have in various ways sought to convey the impression that the proposed reforms will be harmful for customers and destabilizing for markets. To anyone with any knowledge of the how these firms performed over the past decade, these are ludicrous claims to make!

Are the Big Four really trying to have us believe that the status quo is tenable? Do they think they did such a splendid job with exacting and stringent bank audits during the global credit bubble of 2004-07 that their approach to auditing should be untouched? The financial statements they signed off in those go-go years were just so dependable, we surely owe them a debt of gratitude for the steps they took to prevent financial Armageddon, don't we?

Well, no, actually.

Ian Powell, chairman of PwC UK and head of PwC in Europe, who made a name for himself in one of the evidence-gathering sessions of a House of Lords inquiry last November, said:-

“Adding cost and complexity to business will not help European capital markets, investors and business. The Commission’s focus should instead be directed to measures which reinforce trust in audited information by focusing on audit quality.”

Given the inadequacy of many of the bank audits carried out by PWC in the build up the crisis, you couldn't really make this up! For the record, PWC's audit of the Icelandic banks Landsbanki and Glitnir, both of which collapsed and had to be nationalized in October 2008, have been found wanting by an Icelandic-prosecutor group of investigators. In its capacity as auditor of Glitnir, PwC has also been named as a defendant in a legal claim brought by US bond investors.

PWC was slated by the House of Lords inquiry for serious failings in its pre-implosion audits of the basket case British bank Northern Rock. All of the 'Big Four' firms were slammed by the same parliamentary inquiry for their "disconcertingly complacent" view of their role in the financial crisis.

I suspect that the real reason that Powell and his ‘Big Four’ counterparts dislike Barnier’s proposals has nothing to do with whether they are good or bad for customers, but because they will overturn their oligopolistic and tainted business models.

The reforms will be also hard work for the likes of Powell, requiring 'Big Four' firms to reconfigure, if not break up, their businesses. The firms's revenues will take a massive hit, and the average 'Big Four' partner will have to scrape by one a few hundred-thousand euros less each year.

As I've said in earlier posts, the 'Big four's' business model is characterized by

  • Largely apathetic clients who are unable differentiate between the quality of service provided by four large firms
  • Dangerous conflicts of interest
  • Tentacle-like (multi-disciplinary and therefore conflicted) relationships with corporations, regulators, and governments.

The degree of stasis in the audit market is extraordinary. Some British Plcs have been using the same firm of auditors for over a century – Barclays has used PwC since 1896. The danger, of course, is the audit firm, and its partners, get "in with bricks", losing their professional skepticism and becoming willing to rubber-stamp (or perhaps even to encourage the adoption) all sorts of questionable numbers just so they can keep the business, keep providing other, non-audit services to the same client and keep those lifestyles afloat.

Unsurprisingly Barnier’s proposed reforms went down rather better with ‘mid-tier’ accountancy firms. These firms, which include Baker Tilly, Grant Thornton, Mazars, and RSM Tenon believe the proposed reforms will give them a ‘ticket to the game’ of auditing large multinational companies (currently almost entirely the preserve of the 'Big Four') and a greater chance on encroaching on the ‘Big Four’s lucrative turf in other sectors.

Geoff Goodyear, chairman of audit network Russell Bedford International, said:-

“While both the Big Four have lobbied intensely against its introduction, we have always maintained that mandatory rotation is the only way to break the obvious over-concentration in this market – and provide public interest entities with a proper choice."

Edward Nusbaum, chief executive of Grant Thornton International said:

“Investors have said they want a more vibrant, open and less concentrated market for the audit of large listed companies and to build trust for the independence of the audit profession. The time is right to find solutions to their needs.”

But BDO was much more negative about Barnier. In a press release, the firm expressed grave disappointment that the plan for mandatory joint audits has been shelved, and overall said that "an opportunity to reform the market is being lost."

Summary of the Barnier reforms:

  • The reforms would require the Big Four to separate their audit and consulting arms within the European Union
  • Companies would have to rotate their audit firm every six to nine years
  • Audit firms would be banned from selling ancillary services to audit clients
  • The European Securities and Markets Authority – the new European markets regulator – has also been lined up to co-ordinate the work of national audit regulators
  • The largest audit firms would be obliged to devise contingency plans to cover the possibility that they might collapse in the manner of Arthur Andersen, which audited (or cooked) Enron’s books
  • Banks would be banned from stipulating that a company use a Big Four auditor as a condition of lending it money
  • Mandatory joint audits -a mid-tier favorite in the original EC Green Paper on Audit- has been ditched but companies who opt to choose joint auditors could have their mandatory rotation period extended from six years to nine years

Further reading on accountancy and auditing:

Tags: accountancy , accountants , Arthur Anderson , audit , audit rotation , auditing , auditors , Baker Tilly , Barclays , Deloitte , Enron , Ernst & Young , ESMA , European Commission , Glitnir , Grant Thornton , House of Lords , Ian Powell , Iceland , KPMG , Landsbanki , Mazars , Michel Barnier , Northern Rock , PWC , RSM Tenon , Russell Bedford
  • Bookmark and Share
  • Mail to a friend


or register to post your comments.

Back to QFINANCE Blogs

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • RSS
  • Bookmark and Share

Blog Contributors