By Ian Fraser
Published: Sunday Herald
Date: 2 October 2011
The “Big Four” accountancy firms, whose complacency and dereliction of duty were major contributors to the banking crisis that tipped the UK into recession, could be getting their comeuppance at the hands of the European Union.
The story of Deloitte, Ernst & Young, KPMG and PWC and their obliviousness to malfeasance and fraud in the banking sector in the bubble years has not been sufficiently told. They didn’t raise any red flags about the massive risks that were building up in the financial system. And they gave a clean bill of health to numerous diseased brands including HBOS and Royal Bank of Scotland weeks before the undertakers arrived.
Why did they lose their professional scepticism? Because in the 1980s the larger accountancy firms made a conscious decision to transform themselves into vast and multi-tentacled commercial firms. In such a structure, boring old audit gets used as a “loss leader” to secure more lucrative consultancy and advisory work. This creates clear scope for conflicts of interest, with audit partners sometimes tapped on the shoulder and told to ‘go easy’ for fear the firm will lose business elsewhere.
Chartered accountant and economist Richard J Murphy says: “It is not just wrong but ethically repugnant that firms can audit their own advice, as PWC did when they advised on Northern Rocks’ use of its shadow bank and then audited that same advice, with calamitous consequences for which they have not been held liable.”
Proposals from the EU’s internal market commissioner Michel Barnier would put a stop to all this. He wants to force accountancy firms to choose between being consultants or auditors. As already happens in France, audit firms would have to work jointly with other audit firms and face time limits on how long they could act as auditors to the same company.
The Big Four are aghast at these proposals. Their lobbying machine is already getting into gear and they’re warning of “unintended consequences”. In the UK, the Big Four may gain some traction. The firms enjoy an entrenched position thanks to the revolving door between the Big Four and the civil service, and indeed regulators and government agencies, via secondments and government contracts. The Big Four also have some powerful friends in high places – financial secretary to the Treasury Mark Hoban, economic secretary to the Treasury Justine Greening, and Scottish secretary Michael Moore are all ex-PWC accountants. The minister for skills Nick Gibb is ex-KPMG.
The outcome of Barnier’s plan remains uncertain. However policymakers need to set aside their cronyism and ask themselves a simple question. Can the UK really afford to maintain an accountancy profession which, by its own actions, has proved itself to be a danger to capitalism? Barnier’s proposals would not fully address the problem, but they are a sensible start.