King defends auditing firms’ consulting gigs
Corporate governance maven sees value in ‘cross-pollination’
● There may be calls for accounting firms to divest from consulting work to solve conflict-of-interest issues, but corporate governance expert Professor Mervyn King thinks that is not the best scenario for the sector.
The calls come after a string of international accounting scandals involving groups such as Steinhoff. Fingers have been pointed at auditing firms for not detecting alleged fraud.
King, a Unisa professor extraordinaire and former Supreme Court of Appeal judge, is known for his King codes, the benchmark for corporate governance in SA.
Commenting on the concentrated nature of the auditing industry, King said that without the big four — EY, KPMG, PwC and Deloitte, which he refers to as the “final four” as it is unlikely any other accounting firms will reach their size and scale — it would be difficult for multinationals to operate.
“We know the world is physically round but factually it’s flat, borderless and electronic ... you have multinational enterprises operating in many different jurisdictions with different laws and different codes in these jurisdictions. You need an auditor with geographic spread and expertise, and that expertise now needs to be technologyenabled,” he told Business Times this week.
King said if the big four were broken up it would limit their geographical spread, and while there would be a perception of increased competition among auditors, this would be limited by the geographical spread of the various firms.
Advisory and consulting work has become an increasingly lucrative business for auditing firms. Revenue in 2017 for each of the big four for advisory and consulting work amounted to between $8bn (R116.4bn) and $14bn, while audit and assurance accounted for between $10bn and $16bn, according to data from Statista.
He said that in his experience, auditors who have spent some time in the advisory business gain a better understanding of the business at hand.
“Having an auditor that has spent three years in tax advisory and comes back to auditing and then spends another three years in M&A, [they] look at things with much more informed eyes. You break that away, you can’t get the cross-pollination.”
He said that the biggest threat to the big four was the liability they faced from the discovery of auditing scandals. Liquidators see auditors as having the deepest pockets and as a way of recovering funds to pay a group’s outstanding obligations.
King said both internal and external auditors are very exposed to corporate failure, but blame cannot be completely placed at
Having an auditor that has spent three years in tax advisory, [they] look at things with much more informed eyes
Mervyn King
their door. “I certainly know of no corporate collapse where the sole cause of the corporate collapse was the auditor’s failing to apply the standard of auditing. There is conglomeration of things that cause a collapse,” he said.
King told members of the Institute for Internal Auditors of SA (IIASA) at its annual conference in Sandton this week that internal auditors’ exposure to corporate failure was particularly an issue for large internal audit teams that could be held jointly liable for wrongful acts committed by one of the team members.
He said that the liability of audit firms should be proportional, and he was looking to push for international standards to attribute blame when a company collapses. He also suggested the IIASA draft a standard employment contract that provides for the apportionment of blame in such cases.
“Accountants are trained not to be your friend as the client. They actually have oversight, they are watchdogs. They are not bloodhounds there to sniff out fraud, but they must not be a lapdog.”
In coming years, King said, the profession would have to evolve as companies move further into the world of intangible assets.
He said that the relevance of the profes- sion was in decline as investors placed more importance on the potential growth of companies than their current earnings.
He pointed to companies such as Netflix, in which growth in subscriber numbers and intellectual property were far more important than profits at this stage.
Amazon was another company that for years had reported losses while still being one of the largest tech groups in the world.
King said that auditors would have to find a way to become more relevant in this “century of intangible assets”. They would have to offer a way to measure the true value of those intangible assets, he said.