PwC’s Feargal O’Rourke on the Big Four breakup bid
PwC Ireland boss on the evolution of his industry and the pandemic’s fallout
Breaking up the Big Four audit firms won’t solve the problem of major corporations collapsing apparently without warning and with clean audit histories, according to Feargal O’Rourke, managing partner with PwC Ireland.
High-profile financial scandals and corporate collapses mean the UK’s accountancy regulator is actively looking looked at the possibility of breaking up the dominance of the so-called ‘Big Four’ of PwC, Deloitte, KPMG, and EY.
It is a subject O’Rourke, a 35-year veteran in the industry, has views on. He’s defensive of his sector – most audited companies don’t collapse in scandal, he points out, but admits that change – and possibly major change – is coming.
“All the Big Four do literally hundreds of thousands of audits between them every year, and yet we talk about one or two every so often of business failures which the auditor gets the blame for,” he says.
“The first argument often made is ‘the audit tends to be a smaller part of the overall relationship you have with a client and therefore you can get compromised because of all the other work you do for that client’, and if I’m honest, that was true maybe 30 years ago. That mismatch between the audit fee and all the other fees that imbalance, it’s not true now,” he says.
“If you are the auditor now you can’t do much [work for a client] except the audit, so I don’t accept that,” he adds.
O’Rourke thinks audit reports in future will contain “a lot more non-financial statements… so you’ll be auditing around your social and your environmental goals”.
“If I go forward, five or 10 years, I think you see a different sort of audit. I think, for example, right now the audit is historic in nature, you come in after the year-end and you say ‘this is how you did in 2020’. I think if you go four or five to 10 years, the audit will be much more real-time you’ll be seeing this how the company is doing right now, at this very moment, the last quarter.”
One thing everybody can agree on is that high-quality audits are needed.
“I genuinely don’t think the answer is around breaking up the Big Four, I think the answer is around saying ‘okay, if we’re all agreed the highest quality is what we want, what do we need to do to make sure the quality bar is high?’ And I suppose recognising that,” he says.
Our interview is conducted over computer screens, that’s par for the course these days as Level 5 restrictions have again forced people to work from home where possible.
Investments in technology and culture mean PwC was able to move to remote working seamlessly, according to O’Rourke.
While flexible working is expected to continue in a postCovid world, he believes the office will remain “important”.
“We are, at the end of the day, a learning organisation, people come in, they learn, get qualified, they watch how people behave in certain circumstances, and so the office is important, but the days of people going in from dawn to dusk, Monday to Friday – they’re over,” he says.
More working from home will mean “a cooling of demand” for office space in Dublin.
“I think the demand for office space in Dublin city, if we go back to March had been really on an upward trajectory. I think it was flattened off a bit. I don’t think it will drop very much.”
PwC Ireland had been considering adding an office around the M50 where people from outside Dublin could “drop in”.
“We’ve kind of torn that up and started again from scratch. We’re not looking to downsize in any shape or form. Will we be looking for extra space? No, I think it unlikely, notwithstanding, we’re continuing to grow,” he says.
A common issue with working from home is that it can be difficult to switch off.
For O’Rourke, who says he spent Christmas reading books, drinking some “really nice red wine and ate my body weight in chocolate”, he makes sure to get out for walks and runs.
“There’s an intensity and a monotony about working from home that is difficult,” he says.
“I think I’ve walked more, certainly in the last nine months…”
While Covid has dominated the last year, Brexit, and the reality of post-Brexit trade are starting to come to the fore again.
The next three months are “going to be difficult” for Irish firms that trade with the UK, he says. While the UK and EU have agreed on a free-trade agreement, firms that move goods to, from or through Britain face additional customs requirements.
O’Rourke is very much up to speed on the implications of the deal for businesses here.
Last week he spoke with “the guys at Dublin port”, who he says had “a very, very busy last few months of 2020” as businesses across the country engaged in stockpiling.
“They [in Dublin port] were saying it’s quiet in January, normally it would be quiet. But they were seeing the first teething problems of the non-tariff barriers, the documentation,” the Westmeath native says.
“I think the next three months are going to be difficult, I think there’s going to be a lot of queues, there’s going to be a lot of people pulling out their hair.”
Businesses knew they needed to get Brexit ready but in lots of cases put it on the long finger.
“There was this sense of ‘ah yeah, but sure it mightn’t happen, and even if it does happen’. There was this seductive undertone of, ‘but sure it will be tariff-free and quota-free’, and that’s true, but it never really recognised that the UK is now a non-EU country with all the paperwork that comes with it as if you’re exporting to the US, or South America or Australia or whatever. So I think we are in for three to five months of just teething problems.”
He does, however, think things will get easier for firms.
“We will deal with this, as we did with everything else. It will be messy for three to five months, and then we will manage as we’ve always managed to get the paperwork in place, and we will reconfigure our business,” O’Rourke says, adding that he thinks “by July there is going to be a lot less noise about Brexit and how it’s impacting business”.
A graduate of UCD, O’Rourke joined PwC 35 years ago. In July 2015 he was elected managing partner of the firm, which employs around 3,000 people in Ireland.
In three and a half decades there were “probably three occasions” when he considered leaving for other opportunities, he says.
An obvious option was politics. His mother, Mary O’Rourke, and uncle, the late Brian Lenihan senior, as well as his grandfather were all TDs. His cousins Conor and the late Finance Minister Brian Lenihan became TDs and ministers.
Early on in his career, aged 25, he was approached to run for the party.
“I wouldn’t have got elected,
‘If you are the auditor now you can’t do much for a client except the audit’
I would have been a sweeper candidate, but would have got a Seanad seat probably. A lot of people, my friends and colleagues, my cousins, they were all going into politics and I thought about it,” he says.
However, a partner in PwC – Tom Grace – advised him that “there’s a fair chance you could run PwC and there’s a fair chance you could run the country, but you can’t do both”.
O’Rourke stuck with finance and is “so glad I did”.
“I do think I have the best job in town, I work with brilliant people, I work with brilliant companies. I’m quite well paid for the work, the value that I add to society, but I love it,” he says.
Over the course of his career at the firm, O’Rourke has seen huge change – the biggest being the change in pace of business and the impact of technology on the way people work.
Nonetheless, he is of the opinion that if you took a really good partner from the 1970s, 80s or 90s and put them into today’s world of work they would get on fine.
“The skills for managing people, the skills for winning work, the skills for understanding what a client is looking for, meeting those needs, they all remain timeless,” according to O’Rourke.
As well as being managing partner of PwC Ireland, O’Rourke is also a member of the PwC EMEA Leadership Team.
In addition, he has been appointed by a number of Irish governments to various roles.
He is very vocal on both the steps that have been taken to limit the impact of Covid-19 and where he sees the Irish economy heading over the next 12 months.
Regarding what has been done to-date, O’Rourke says “the approach the Government has taken is a good one, they tried to limit the level of unemployment because they figured out if a job is extinguished, it’s hard to get that job back”.
In addition, he points to the impact of “having the preponderance of the US multinationals in technology and pharma, they’re still doing very well”.
With some companies having been able to go into “hibernation,” by this summer, O’Rourke believes things will start getting back to normal. For many firms, this could be a “pinch point” for them.
“Then with the demands start coming back in again, around where you’ll have to start paying your tax debts, your landlord, your banks. I think there are some businesses that are out there that are in hibernation at the moment, that when all the supports fall away, I think will struggle.”
This will become apparent, according to O’Rourke, in the second, or more likely the third quarter of this year, when he thinks “a number of businesses” will start to fail.
“Because they would have been kept on life support during the last few months, some of them will successfully come off life support, some of them won’t, so I think we’ve got to be careful,” he warns.
While interest rates are at historically low levels, allowing the Government to borrow means “at some point in the future our balance sheet is going to look fairly loaded with debt”.
“People have lived with low interest rates for a decade, these will come in cycles and the last thing we need is, you know, five to 10 years out, interest rates start to go up again, and we’re caught with a lot of debt on our balance sheet. The Government at some point towards the end of the year will have to start saying, ‘okay, we need to start paying our way again’.”
From 2014 to 2020, O’Rourke was a board member of the American Chamber of Commerce in Ireland, an unusually tricky time with Donald Trump in the White House.
Joe Biden’s presidency, he says, will result in “the mood music” being “much better for Ireland… But at the end of the day he is the president of the United States, and he’s trying to do what’s right for the US.”
A potential area of tension with the US may well be what appears to be a much more relaxed approach in Europe to China’s accelerating economic and political rise.
Transatlantic divergence on the issue could well test Ireland’s close diplomatic ties to the incoming US administration and there are signs of a backlash even in Brussels.
For O’Rourke the expansion of Chinese economic interests here is a potential boost.
“China is trying to expand its influence around the globe. I think we can be the gateway to Europe in the same way as we are the gateway to Europe for the US and in particular now since the UK have left,” he says.
“China are not going to be interested in Ireland for Ireland’s sake. We’re a small part of the market. But as a sensible gateway to Europe, that’s where we need to position ourselves.”
Ireland’s balance sheet is going to look fairly loaded with debt