Issue of the week: tackling Britain’s audit crisis
The big bean counters have been enjoying a bonanza, but constant scandals could force drastic change
The audit profession, we’ve been told, is facing one of the biggest crises in its history. But tell that to the partners of Deloitte. They “are set for their biggest payday in nearly a decade”, said Harry Wilson in The Times. Following another year of rising revenues, the firm’s 702 equity partners will each pocket £832,000, taking the profit share amassed by an average partner working at Deloitte for the past ten years to nearly £8.2m. The payouts show “the rich rewards on offer to the UK’S most senior accountants, who’ve continued to prosper in the post-crisis world”. They also highlight the stranglehold the “Big Four” – Deloitte, EY, KPMG and PWC – continue to exert on the market. This handful of firms now audits 98% of the FTSE 350 and all but one company in the FTSE 100 index. But a string of recent scandals, including the implosion of the giant government outsourcer Carillion and the collapse of BHS, have left them struggling to defend accusations “that they routinely put profits ahead of responsibilities to properly scrutinise clients”. Now they face calls for a break-up.
The main charge against the Big Four is that they’re too cosy with clients, preferring “to kowtow” to those who “may also be a profitable source of consulting income” rather than challenging them, said Madison Marriage and Jonathan Ford in the FT. As a result, they fail to spot accounting chicanery. A glaring example is KPMG’S relationship with South Africa’s billionaire Gupta family, which has been at the centre of a huge government corruption scandal in South Africa. That might be an extreme case, but all the Big Four “have come under fire over their client relationships in recent years”. Senior executives are “painfully aware” of the criticism, but few accept their auditors “are ever swayed by commercial interests when signing off on a company’s accounts”. Some have rejigged bonus structures so that audit quality is now the key measure determining pay. “But observers fear such changes amount to no more than small tweaks to a fundamentally flawed system.”
The more radical ideas for reform, “such as splitting the Big Four into eight”, would cause massive trauma in the sector, said Oliver Shah in The Sunday Times. But “an industry as staid and established as this is never going to shake itself up properly”. All the more reason for a drastic intervention, said Anthony Hilton in the London Evening Standard. It was once common for local authorities to conduct audits, and there is nothing to prevent civil servants relearning old skills to provide an “objective” and “independent” service. If we want to restore the status of auditing, why not simply “nationalise” it?