Watch­dog must cut Big Four au­di­tors down to size

‘The pub­lic in­ter­est as­pect of au­dit­ing seems to have been for­got­ten’

The Daily Telegraph - Business - - Business Comment - Ben Mar­low

Who says ac­coun­tants don’t have a sense of hu­mour? At least one does: Steve Var­ley, out­go­ing boss of EY, who has com­plained that break­ing up the Big Four could have a neg­a­tive im­pact on the qual­ity of com­pany au­dits. Has Var­ley been trapped in a fil­ing cabi­net some­where for the last few months? There must be some ex­pla­na­tion as to why one of the in­dus­try’s key fig­ures is so out of touch.

It would cer­tainly be dif­fi­cult to think of a more tin-eared claim than the one Var­ley made in a weekend in­ter­view about be­ing proud of EY’s “un­par­al­leled” record. Un­less of course he meant un­par­al­leled in terms of the num­ber of high-pro­file calami­ties it has been caught up in.

EY is fac­ing some deeply un­com­fort­able ques­tions in Ger­many about its decade-long role as the au­di­tor of col­lapsed fin­tech star Wire­card, to add to in­ves­ti­ga­tions in the UK about its au­dits of bust pri­vate hos­pi­tal op­er­a­tor NMC Health and bank­rupt travel op­er­a­tor Thomas Cook. In these in­stances, it would ap­pear that EY didn’t so much keep the books as lose them.

True, the ac­coun­tant received no fines or sanc­tions from the Fi­nan­cial Re­port­ing Coun­cil last year, un­like chief ri­vals KPMG, PwC and Deloitte, but you wouldn’t bet on that still be­ing true this time next year.

Thank­fully, the reg­u­la­tor is hav­ing none of it, in­struct­ing the Big Four to sep­a­rate their au­dit­ing units from their con­sult­ing busi­nesses.

It is the right move, though a four-year time­frame in which to com­plete the over­haul feels un­nec­es­sar­ily gen­er­ous.

The FRC said the ob­jec­tive was to en­sure that au­dit prac­tices were fo­cused on de­liv­ery of high qual­ity in the pub­lic in­ter­est, and did not rely on per­sis­tent cross-sub­sidy from the rest of the firm.

Quite right too. The pub­lic in­ter­est as­pect of au­dit­ing seems to have been for­got­ten in re­cent years, amid ag­gres­sive ex­pan­sion into more lu­cra­tive ser­vices such as tax, M&A and re­struc­tur­ing ad­vice.

With the Big Four now gen­er­at­ing the ma­jor­ity of their rev­enues from con­sul­tancy prac­tices, com­pared with just 20pc from au­dit, the con­flict of in­ter­est is blind­ingly ob­vi­ous. But af­ter a series of sweep­ing re­views, the FRC can and should go much fur­ther. As City grandee Sir Don­ald Bry­don pointed out in his 138-page dossier, au­dit­ing is cru­cial to pub­lic trust in cap­i­tal­ism. Ac­counts need to be more than a sim­ple rep­re­sen­ta­tion of a “true and fair view” of a com­pany’s fi­nan­cial po­si­tion, a nar­row def­i­ni­tion that the in­dus­try has hid­den be­hind for far too long.

There needs to be more re­spon­si­bil­ity and independen­ce be­yond box-tick­ing so that ac­counts are prop­erly scru­ti­nised. Ques­tion­able ac­count­ing meth­ods have be­come too wide­spread.

Re­plac­ing the “go­ing con­cern” state­ment with a broader dec­la­ra­tion of “re­silience”, and re­quir­ing au­di­tors to at least “en­deav­our to” find wrong­do­ing, are also ex­cel­lent pro­pos­als.

Di­rec­tors can’t run away from their re­spon­si­bil­ity ei­ther. Forc­ing com­pa­nies to con­firm that div­i­dends do not threaten their fi­nan­cial sta­bil­ity seems per­fectly fair, as does al­low­ing in­vestors to grill the au­dit com­mit­tee chair­man at an­nual meet­ings. In­com­pe­tence and com­pla­cency are bet­ter words to de­scribe the au­dit­ing pro­fes­sion right now.

Spare the tears over Lloyds boss’ exit

Ig­nore the ef­fu­sive good­bye at Lloyds for An­to­nio Horta-Osorio. These grand farewells for chief ex­ec­u­tives are be­com­ing as silly as Oscar ac­cep­tance speeches. Yes, he did a de­cent job in dif­fi­cult cir­cum­stances, but he’s per­fectly re­place­able. Most bosses are.

Although the Por­tuguese says he has “mixed emo­tions”, share­hold­ers seem more cer­tain of how they feel – the share price bounced as much as 2pc af­ter the twin de­par­tures of its chief ex­ec­u­tive and chair­man Nor­man Blackwell were an­nounced.

Horta-Osorio did a good job nurs­ing Lloyds back to health af­ter the fi­nan­cial cri­sis, steering it back into pri­vate hands. Of­fload­ing over­seas as­sets was the right move. The em­pire-build­ing of the past had cre­ated a weaker bank, not a stronger one, but the bal­ance sheet needed bol­ster­ing so he had lit­tle choice.

Yet past mis­deeds were never far away. A £21bn bill for PPI mis-sell­ing was eye-wa­ter­ing, and the Cranston re­port into the HBOS Read­ing fraud scan­dal was damn­ing of se­nior man­age­ment.

Horta-Osorio also re­peat­edly showed a tin ear to con­cerns about pay. Robin Bu­den­berg needs to bring some bal­last to the board as the new chair­man. Mean­while, at­tempts to cre­ate a do­mes­tic cham­pion, com­plete with empty slo­gans about “help­ing Bri­tain pros­per”, are ad­mirable but dou­bling down on mort­gages and car fi­nance presents other prob­lems as the UK en­ters the worst re­ces­sion in a decade.

The smart money is on a re­turn to the div­i­dend list be­fore he leaves next year. Hav­ing col­lected £60m in salary and bonuses, it may go some way to mak­ing up for a share price that is half where it was when he took charge.

High hopes for new Aviva boss

The departure of Mau­rice Tul­loch at Aviva looks like the right de­ci­sion in the wrong cir­cum­stances. The Cana­dian is leav­ing af­ter just over a year in charge to care for his wife, who is in poor health, but it fol­lows wide­spread share­holder dis­con­tent with his strat­egy.

Tul­loch played it safe with a de­ci­sion to keep the in­surer in­tact when in­vestors and some board mem­bers were push­ing hard to be more rad­i­cal.

Suc­ces­sor Amanda Blanc is keep­ing her cards close to her chest but is al­ready promis­ing to “act and act quickly”. A share price leap of 4pc means the clock is al­ready tick­ing.

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