The Big Four accountancy firms; KPMG, Deloitte, EY and PwC are the four largest auditors of modern businesses. They also happen to have overseen the major corporate disasters experienced by Tesco and Carillion whilst declaring these companies to be fit to trade and properly financed.
Sadly, despite these disasters, there seems to be a closed shop for auditors of large companies – I couldn’t name you another firm that deals with one of the FTSE100. Perhaps Grant Thornton, but even they took me several minutes to dredge up.
My accusation is a simple one. These firms are failing corporate Britain and failing our country as a whole. These enormous firms need splitting up, breaking down and holding to account for their actions to protect our nation from corporate leeches that risk destroying our economy with their greed and recklessness.
These firms are supposed to provide investors and stakeholders with a level of certainty in the companies that they audit. Indeed, their product (an auditors report) starts with the phrase “true and fair view”, indicating that what is to follow is a fair representation of a company’s financial well-being and a confirmation of their compliance with company law.
Upset the management, lose the contract. Upset the shareholders, lose nothing.
Unfortunately, this is not always the case, as seen in the recent Carillion debacle. A major listed company for many years, what happened to Carillion was not only poor management but aggressive accounting designed to hide losses and mispresent contracts to the outside world.
As an external investor in the company, I received regular updates on the company’s trading condition which reported strong revenues, good customer relations and listed a whole host of achievements which gave me confidence in the company as a whole. After investing with them and receiving healthy dividends for almost two years, it was all revealed as a lie – the company had little chance of surviving with current liabilities far outweighing assets, humungous unpaid bills and a batch of bad contracts which suffered from both poor negotiation, management, and oversight.
This needs to be addressed. As an investor, I have no way to differentiate between a good audit and a bad one – for all I know, every company I’m investing in that is audited by one of the Big Four (about 50% of my portfolio) is actually in exactly the same situation as Carillion. Even when provided with supplementary information from the auditor, details of risk are usually presented in a way that confuses the reality of the situation.
This isn’t a problem uniquely identified by myself. Several high-profile business papers, including the Financial Times and The Economist, have written numerous articles about the dangers of poor quality audits carried out by the Big Four. Despite this, the FTSE100 companies still vote to use them, and only them, for their audits. When auditors are awarded these contracts, I imagine they feel obliged to pander to the needs of executives paying the auditor’s contract, rather than the shareholders who read the reports, creating an absurd conflict of interest. Add in the various ‘consultancy’ fees charged by these firms and that conflict becomes greater still – upset the management, lose the contract. Lie to the shareholders, lose nothing.
The entire audit market is entirely dysfunctional. Splitting the consultants from the auditors would go some way towards reducing the conflict of interest. The firms are already restricted, but not sufficiently – some firms even go on to consult after losing the audit mandate, retaining the conflict during the work of the audit.
Charging shareholders a small fee paid for from stamp duty on shares could pay from independent audits run by the share market listing the company. In this event, if an audit found irregularities, they would not lose the contract, but could actually be rewarded for presenting dangerous findings that threaten the legitimacy of the index as a whole.
Auditors should be held accountable for their mistakes. The multiple instances of auditors signing off the accounts of companies that go bankrupt or hit major trading difficulties undermine the health of the British economy and threaten the global legitimacy of our country as a place to do business.