Watchdog must cut Big Four auditors down to size
‘The public interest aspect of auditing seems to have been forgotten’
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.