Big Four finally held to account

By Ian Fraser

Published: Sunday Herald

Date: October 2nd, 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 (pictured above) 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 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.

Short URL: http://www.ianfraser.org/?p=5002

Posted by on Oct 2 2011. Filed under Article Library, Latest Articles. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

4 Comments for “Big Four finally held to account”

  1. surely striaght out lying and fiddling the figures isn’t dereliction of duty. it’s criminal.
    a local butchers would get more hassle than these companies from the authorities

  2. Agreed. Sadly the accountants have, with the complicity of governments and justiciaries around the world created a system which makes them virtually untouchable (i.e. virtually impossible to sue). Francene McKenna of Re: The Auditors has done some great work on this. Read these three articles to find out more:-
    http://www.qfinance.com/blogs/ian-fraser/2010/09/22/holding-the-auditors-accountable-for-missing-corporate-fraud-auditor-liability and http://www.ianfraser.org/time-to-audit-the-auditors-and-especially-kpmg/ see also http://www.ianfraser.org/auditors-blasted-for-pivotal-role-in-crisis/

  3. […] in the UK has led a commission to curb the dominance of these big four companies. Will the Big Four finally held to account or is it just business as usual? Is there an investigation coming forward in the Republic as well […]

  4. […] Oct 2011  Big Four finally held to account?  by Ian […]

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