RUN ON NUMBERS The role of the big four auditing companies
THE DEATH of former Steinhoff CEO Markus Jooste has dominated news events over the past couple of weeks, and it brings with it a renewed focus on South Africa’s biggest corporate scandal that has shaken the investment community. We find ourselves questioning how things could go so wrong.
Jooste had surrounded himself with some of the country's most astute and highly rated businesspeople. The former chairperson of Steinhoff was the proven business visionary leader Christo Wiese. His head of the Audit Committee was the ex-absa CEO, Steve Boysen, other company directors included Stephan Grobler, Dirk Schreiber, former European finances chief, and ex-director Siegmar Schmidt.
According to media reports, Jooste was to be prosecuted for manipulation of the Steinhoff share price and misrepresentations to other businesspeople such as Jayendra Naidoo, Christo Wiese, and others, such as Braam van Huysteen. In addition, he was to be charged for many years of misstatements in the company’s financials.
1Accounting firms have always been central to the accumulation strategies of the powerful. In the modern financialised economy, they have become even more important. (Financialisation refers to the increasing role of financial motives, financial markets, financial actors, and financial institutions in the operation of the domestic and international economies).
As accounting firms increasingly took on additional functions, particularly as consultancies, they have moved further and further away from the mandate of deterring malfeasance.
After a period of State-led economic policy following World War II, characterised by high tax rates, government spending, and regulation, the 1980s saw a resurgence of free-market ideologues led by former prime minister of the United Kingdom, Margaret Thatcher, and former US President Ronald Reagan.
Their policies at home rapidly slashed corporate taxes and regulations. These ideas were also proliferated throughout the global south by the policies of the International Monetary Fund (IMF) and the World Bank, opening markets for Western corporations to profiteer, often at the expense of public services. These radical free-market ideas, coupled with modern technology and the ease of moving money, prompted the rapid financialisation of the global economy.
In a financialised world, accountants are indispensable. They provide consulting services, including tax advice, financial risk management, and financial management advice, amongst other things. They function as both monitors and spurs of the financialised global economy.
2Offering diverse services, the Big Four specialise in auditing and assurance, ensuring financial transparency, and regulatory compliance for their clients. Additionally, they provide strategic consulting services. All four have their legal headquarters in the UK and command a dominant global market share. The total combined revenue of the big four would place them in the 26th position of companies ranked by earnings, which is not insignificant at all.
It should be obvious that commercially lucrative consultancy services ought not to compromise the credibility of the auditing side of the firm. Unfortunately, evidence increasingly suggests that the Big Four have repeatedly failed to strike and maintain this balance.
With consultancy now making up around two-thirds of their income, these firms must strike a balance to avoid facing an “independence conundrum”.
Deloitte is the largest in terms of headcount, with over 456 000 employees as of the 2023 financial year, followed by Ernst & Young with more than 395 000 workers, and PWC with 364 000. Despite being the smallest among the four, KPMG still has 298 356 employees. The revenue totalling $204 million is generated by 1 513 356 employees collectively, making the revenue generated per employee $132 157, as stated in rands R2 510 975.
For comparative purposes, Standard Bank employed 49 931 people and generated revenue of R42.9 billion, making the revenue per employee R859 185 per annum.
Interestingly, the largest accounting firms were formerly known as the “Big Eight,” but mergers and closures starting in the late 1980s have reduced their number to four. The original group consisted of Arthur Andersen, Arthur Young, Coopers & Lybrand, Deloitte Haskin & Sells, Ernst & Whinney, Peat Marwick Mitchell, Price Waterhouse, and Touche Ross, all headquartered in the US or UK.
Arthur Young merged with Ernst & Whinney, and Deloitte Haskin & Sells combined with Touche Ross. Subsequently, Price Waterhouse and Coopers & Lybrand merged their practices, reducing the count to five. However, following the collapse of Arthur Andersen due to its involvement in the Enron scandal, the “Big Five”, became the present-day four.
3In a research report published by Open Secrets in June 2020 titled The Auditors: Corporations and Economic Crime, the following statement is made: “The Big Four are also regularly seconded into the institutions they consult for. Though this has resulted in multiple conflicts of interest, their role as ‘independent appraisers’ makes them appear indispensable.
“This insider influence has led some to describe the Big Four as ‘quasi-cartels’ capable of influencing the paths of entire countries through their intimate connections to the centres of power and decision-making’.”
The research concludes that: “The latter half of the 20th century saw the rise of global “secrecy jurisdictions” – countries and cities that created legal frameworks for wealthy individuals and corporations to escape both taxes and the rule of law in their own countries. These secrecy jurisdictions have become havens not just for tax-dodging multinationals, but also for a global criminal elite of fraudsters and kleptocrats.
In South Africa, we know too well that the proceeds of the crimes of state capture have long been siphoned through Dubai and Hong Kong on behalf of the Guptas’ enterprises by local branches of global banks. According to the Tax Justice Networks’ Financial Secrecy Index, between $21 trillion and $32 trillion of private financial wealth is located, untaxed or lightly taxed, in secrecy jurisdictions around the world.
These tax avoidance schemes of the Big Four detrimentally impact both the poorest countries and those who live in poverty in wealthier nations. In both instances, the loss of tax revenue constrains State spending on social development and essential services, undermining elected governments and depriving people of jobs and access to services such as healthcare, education, and pensions.
Despite this, their work is cloaked in the language of legitimacy their tax avoidance schemes of the Big Four detrimentally impact both the poorest countries and those who live in poverty
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in wealthier nations.
In both instances, the loss of tax revenue constrains state spending on social development and essential services, undermining elected governments and depriving people of jobs and access to services such as healthcare, education, and pensions. Despite this, their work is cloaked in the language of legitimacy.
Daily we receive warnings from the Financial Sector Conduct Authority (FSCA) about this or the other company or individual not abiding by its rules and regulations.
We never see them come down on the Big Four with penalties such as the R475m, against the late Markus Jooste.
We see banks close accounts of individuals and companies based on reputational damage.
But we do not see the banks act against them.
We do not see the Special Investigating Unit (SIU) raid their offices, nor do we see The Independent Regulatory Board for Auditors (IRBA) taking the Big Four on and investigating criminal charges against the partners.
What action was taken against the auditors of Insure who pretended not to realise that Insure boss, Charl Cilliers, was illegally utilising more than R1.7 billion of Insurers' premiums for his pocket?
The FSCA took such a soft stance on the fraud committed that it is almost laughable, and it leaves one with the impression that they do not understand what has happened.
“Because Burns and Cilliers displayed a lack of ‘honesty and integrity’ in perpetrating the Insure scheme, industry regulator the Financial Sector Conduct Authority debarred the pair for five years from practising as financial service providers.”