How to start an audit of the Big Four... break them up
WHEN I wrote an exposé of the Big Four accountancy firms recently, based on a book by investigative journalist Richard Brooks, I thought their greed, laxity and lack of vigilance would strike a chord with readers, but even I was surprised at the indignation it provoked.
Auditors are the backroom boys of finance, not the stars. Nor are they usually the prime villains in any given City scandal – that role goes to incompetent or corrupt management.
But the bean counters do frequently serve as accomplices, pandering to the desire of executives to produce flattering accounts, aiding and abetting in a rosy view of a company’s books in return for fat audit and consultancy fees.
There is now an attempt by the accountancy regulator, the Financial Reporting Council, to get tough – but only in an effort to save its own skin, because it is under investigation itself by Sir John Kingman, chairman of Legal & General, into whether it is fit for purpose.
The flurry of activity last week does not seem entirely coincidental. First came a stinging penalty on KPMG for its audit of scandal-hit insurance software firm Quindell. Then, as we revealed in these pages last week, a record fine for PwC for its audit of BHS in 2014, which gave a clean bill of health to the retail chain shortly before it was sold for a nominal £1 by Sir Philip Green to a serial bankrupt.
Green is now demanding a judicial review into the FRC’s report into the audit, which may explain why the regulator published no detail along with the notice of the penalties.
Perhaps the criticism heaped on its head for this omission was a little unfair, but it’s not surprising observers suspected the worst. The FRC has been far too close to the industry it purports to regulate, and its instincts are to delay and conceal.
Leaving Sir Philip and this particular case to one side, the FRC has been a frankly pathetic regulator. Its ranks are peppered with former Big Four accountants with the obvious glaring conflicts of interest that entails.
The regulator was markedly reluctant to investigate KPMG over its audit of HBOS, even though it signed off on the accounts shortly before the mortgage bank imploded.
This lack of appetite to get to the bottom of it is just not acceptable in a failure that cost taxpayers billions in bailout support; tens of thousands of employees their jobs; and hit small shareholders in the pocket.
It is part of a bigger problem. The spate of scandals raises questions over whether audits themselves are fit for purpose: in an age of instant data, they ought to be more timely and dynamic. Serious thought also needs to be given to whether the Big Four can be allowed to continue in their current form, or whether they should be broken up. The profession as a whole needs an overhaul. Disbanding the feeble, footdragging FRC is a good place to start. EQUITABLE Life is one of the rare cases where a financial disaster has a happy ending at least for some – though it has been a long time coming.
The downfall of mutual insurer Equitable was one of the City’s worst disasters until the financial crisis, which made it pale into relative insignificance.
It went under in 2000 with a £1 billion-plus black hole, threatening the life savings of thousands of pensioners.
All credit goes to Chris Wiscarson, who took over in 2009 as chief executive, restored the company’s balance sheet, and has now sold it for £1.8 billion, providing decent uplifts for policyholders as part of the process.
It is a great shame though that policyholders had to endure years of worry, and that some died before Wiscarson arrived and sorted out the mess.