It’s high time the Big Four got their comeuppanceby
As the Big Four’s poor performance continues unchecked, the Imprudent Accountant wonders when there will be less hot air and more action from the regulators or government.
Those with very long memories or an interest in arcane history will know that a few decades back, there were eight major accountancy practices. They then slimmed down to six and, following the demise of Arthur Andersen, became what are colloquially known as the Big Four.
While this is hardly a monopoly, the control that the major practices have over the finance sector in the United Kingdom and around the world is looking increasingly unhealthy.
We have reached a position where these practices:
- audit almost all of the companies in the FTSE 100 and most other listed companies around the globe
- regularly screw up audits to the extent that they receive fines running into millions
- provide billions of pounds of consultancy advice to the UK government
- as a result of the above, have significant influence over policies that benefit their own businesses and those of clients (indeed, you could argue that the government is heavily dependent upon their services and major sectors could struggle or even collapse if they withdrew)
- are practically self-regulating, since the bodies that oversee them sometimes appear to lack the necessary degree of independence or the will to take strong action
- have failed to split consultancy services from audit, leading to scandals when stakeholders lose their shirts as a result of audit failures (despite recent efforts by EY)
- blithely assist staff to cheat in exams.
Please accept my apologies if I have missed out any other especially egregious practices.
While nobody would argue that major accountancy firms are institutionally corrupt and the vast majority of their partners and employees should be seen as role models by everyone in the profession, the reputation of the industry is suffering and nobody really seems to care.
When I became an accountant, I joined a profession that was respectable to the point of being regarded as boring. It is sad to say this out loud but that was a major attraction. I knew that if I told friends and family members of my new vocation, they would at the very least not sneer and suggest that I might be regarded as little better than a used car salesman or estate agent.
Sadly, I’m not sure that that is still the case today. Reputationally, politicians and bankers have had a bad time over the past 15 years but, in the wake of Enron, Carillion and numerous other financial scandals, our businesses have also been tarnished by the wrongdoings of the few and have become prime sources for investigative journalists.
There is far too little competition in the upper echelons of the auditing and financial services industry. Ultimately, every major organisation that survives for a decade or two is likely to have been forced to use the services of every one of the Big Four, while it is common for staff to circulate, sometimes rapidly, between the firms, enhancing their salaries if not their reputations every time they do so.
Depending on your outlook, this insularity will lead to a very high degree of expertise and often does. On the other hand, it also ingrains sloppy habits and bad behaviour.
At the moment, the gulf between the top four accountancy practices and their nearest rivals, whether considered on a global basis or locally is gigantic.
Very few CFOs of major companies dare even consider giving audits or major projects to second-tier or smaller practices, primarily because they would be roundly criticised if anything went wrong. Ironically, when the same people offer the same projects to the big boys and they get it wrong, that is just seen as misfortune.
Having identified the problem, like governments, regulatory bodies and others, I am struggling to come up with any practical short-term solution, let alone one that is perfect.
Breaking down practices between audit and consultancy is generally accepted as helpful or necessary but unfortunately the firms involved will not take such a step unless they are forced to do so.
Creating a much stronger regulatory and disciplinary body, both having and using powers to issue fines on a far larger scale and permanently ban miscreants from practising would also make a difference but that also doesn’t seem likely.
When governments are so dependent on “consultants”, rather than employing people in-house, that doesn’t bode well for a crackdown either.
Perhaps a good first step would be to introduce measures that would hold a number of nominated individuals at the pinnacles of these four practices (shall we say three senior members of management at each) responsible for their whole firm’s actions, with statutorily defined penalties including exclusion from the profession, fines that would take their breath away and, in the most extreme cases, criminal proceedings.
In my heart of hearts, I know that there is a much more likely way forward, which involves much hot air and far too little action.