Holding auditors to account

In an old comedy sketch, a careers adviser tells an aspiring lion tamer he is “dull, unimaginative and tedious”. He should keep his day job, as an accountant. Following a string of scandals, that profession has begun to look rather more risky.

The competence of auditors and the dominance of the Big Four — dubbed an “oligarchy” by one UK legislator about to grill KPMG over the collapse of the building company Carillon — are under scrutiny. The case for breaking these firms up deserves much more attention.

The firms’ rapid expansion in consultancy, law and corporate finance advice means audit — crucial to the proper functioning of capital markets — is no longer their main focus. Critics say the waning importance of audit is harmful. Faster-growing, higher-margin specialisations are inevitably attracting the lion’s share of investment, talent and management attention.

A crackdown on conflicts of interest in the wake of the Enron scandal prompted all the big accountants except Deloitte initially to sell off their consultancy arms. In 2011, Brussels mooted splitting firms into audit and consulting divisions. But it wimped out, merely requiring companies to put audits out to tender and restricting the nonaudit fees that can be earned by a company’s auditors.

Separating audit from nonaudit businesses would, by itself, do nothing to remedy the dominance of a few big accountants. Smaller firms do not have the depth to act for the biggest multinationals. But the separation would eliminate conflicts of interest that reduce competition in both specialisations. Audit quality might improve with stronger independence and focus.

Big Four firms argue that audits are improved by the specialist skills of their advisory services. It would also make it harder to attract the best recruits. The personalities drawn to different disciplines are distinctive. Good auditors need scepticism and detachment. Aspiring consultants and lion tamers need not apply. London, February 22