These notes and comments were taken from the ‘UK House of Commons Business, Energy and Industrial Strategy Committee report’ published on March 26th 2019.
The report has its origins, in part, in high-profile corporate collapses such as those of Carillion and BHS, but also:
1.Cites ongoing investigations by the current regulator (the UK Financial Reporting Council) into:
- Conviviality (KPMG)
- Mitie Group (Deloitte)
- Rolls Royce (KPMG)
- Sports Direct (Grant Thornton)
2. Notes previous fines imposed on:
- EY (£2.75m – Tech Data)
- Deloitte (£4m – Aero Inventory)
- PWC (£6m – RSM Tenon)
- KPMG (£3m – Ted Baker)
- KPMG (£3m – Quindell) and
3. Supports replacing the FRC with a new statutory body.
The report refers to “…fears that auditors are conflicted by the commercial culture in which they operate. The culture of advisory services does not sit easily with the culture of challenge required by audit” and recommends that the Competition & Markets Authority “…aims for a structural split or at the very least implements its proposed operational split between audit and non-audit”. If that doesn’t work “…a full structural break-up of the Big Four into audit and non-audit businesses” should result.
On top of that is the fact that the Big Four dominate the market for listed and larger corporates, meaning that choice is limited and competition stifled.
It seems to me that we have heard all of this before, without much having changed over the years. It’s analogous to the dominance of the Big Three credit rating agencies, which the financial services industry regulators have sought, but as yet failed, to reduce.
The problem’s root lies at the level of decision-making by senior individuals in firms. Do you recommend to your Board that it appoints a so-called Second Division firm to carry out audit or consultng work, or do you stick with the (supposedly) safe bet? The old saying is that you’ll never get fired for using [insert the name of any one of the Big Four] even if they screw up mightily or, as is more common but less of a headline, the service they give is mediocre (as well as expensive).
My own guess is that eventually the split between auditing and the far more profitable consulting work will have to be enforced, and that the new statutory regulatory body will also provide stimuli to greater competition in the auditing industry, perhaps by further stiffening the rotation rules (intra-firm and inter-company).
By the way, financial institutions get a special, although inconclusive, mention: “We recommend that because of their strategic importance the Government should examine the auditing of banks to explore whether additional safeguards are required in this sector.”
Now there’s something to look forward to…