{"id":57930,"date":"2018-12-02T17:25:17","date_gmt":"2018-12-02T11:55:17","guid":{"rendered":"http:\/\/www.indialegallive.com\/?p=57930"},"modified":"2018-12-02T17:25:20","modified_gmt":"2018-12-02T11:55:20","slug":"auditing-firms-scandal-hits-big-four","status":"publish","type":"post","link":"https:\/\/www.indialegallive.com\/world-news\/global-trends-news\/auditing-firms-scandal-hits-big-four\/","title":{"rendered":"Auditing Firms: Scandal Hits Big Four"},"content":{"rendered":"<div id=\"tdi_1\" class=\"tdc-row\"><div class=\"vc_row tdi_2  wpb_row td-pb-row\" >\n<style scoped>\n\n\/* custom css *\/\n.tdi_2,\r\n                .tdi_2 .tdc-columns{\r\n                    min-height: 0;\r\n                }.tdi_2,\r\n\t\t\t\t.tdi_2 .tdc-columns{\r\n\t\t\t\t    display: block;\r\n\t\t\t\t}.tdi_2 .tdc-columns{\r\n\t\t\t\t    width: 100%;\r\n\t\t\t\t}\n<\/style><div class=\"vc_column tdi_4  wpb_column vc_column_container tdc-column td-pb-span12\">\n<style scoped>\n\n\/* custom css *\/\n.tdi_4{\r\n                    vertical-align: baseline;\r\n                }.tdi_4 > .wpb_wrapper,\r\n\t\t\t\t.tdi_4 > .wpb_wrapper > .tdc-elements{\r\n\t\t\t\t    display: block;\r\n\t\t\t\t}.tdi_4 > .wpb_wrapper > .tdc-elements{\r\n\t\t\t\t    width: 100%;\r\n\t\t\t\t}.tdi_4 > .wpb_wrapper > .vc_row_inner{\r\n\t\t\t\t    width: auto;\r\n\t\t\t\t}.tdi_4 > .wpb_wrapper{\r\n\t\t\t\t    width: auto;\r\n\t\t\t\t    height: auto;\r\n\t\t\t\t}\n<\/style><div class=\"wpb_wrapper\"><div class=\"wpb_wrapper wpb_text_column td_block_wrap td_block_wrap vc_column_text tdi_5  tagdiv-type td-pb-border-top td_block_template_1\"  data-td-block-uid=\"tdi_5\" ><div class=\"td-block-title-wrap\"><\/div><div class=\"td-fix-index\"><p><em>Above: Department store chain BHS (top) shut down in 2016\/Photo: commons.wikimedia.org<\/em><\/p>\n<p><strong>The collapse of some leading British companies has forced the Competition and Markets Authority to launch a review of these accountancy firms which have created an oligopoly <\/strong><\/p>\n<p><strong>By Sajeda Momin in London<\/strong><\/p>\n<p>Nearly two decades after the fall of Enron in a notorious financial scam that led to the dissolution of Arthur Andersen, one of the five largest audit and accountancy partnerships in the world, the focus is back on the audit sector after a string of scandals in British business.<\/p>\n<p>The collapse of leading department store chain British Home Store (BHS) in 2016 and construction and outsourcing group Carillion earlier this year has forced Britain\u2019s competition watchdog, the Competition and Markets Authority (CMA), to launch a review of the country\u2019s auditing business.<\/p>\n<p>The CMA is investigating standards in the auditing business which is dominated by four big accountancy firms\u2014Deloitte Touche Tohmatsu Ltd (Deloitte), Ernst Young (EY), Price\u00adwaterhouseCoopers (PwC) and Klynveld Peat Marwick Goerdeler (KPMG), known as the Big Four\u2014and looking into the demands for them to be broken up. The provisional report is expected to be ready by Christmas.<\/p>\n<p>The auditing sector was ruled by the Big Eight until the 1990s when a string of mergers shrank the companies to the Big Five that included Arthur Andersen. In 2002, the collapse of Arthur Andersen, thanks to Enron, brought the elite group down to four. Since then, these companies have been dominating auditing and accounting businesses around the world.<\/p>\n<p>The CMA has launched the investigation in response to charges that the Big Four have created an oligopoly making them \u201ctoo big to fail\u201d and that lack of competition has driven down audit qua\u00adlity. The four firms audit all but one of the FTSE\u2019s 100 companies and 98 percent of FTSE\u2019s 350 businesses. Earlier in the year, the UK\u2019s fifth largest accounting firm, Grant Thornton, said it would stop bidding for auditing work as it could no longer compete with the Big Four.<\/p>\n<p>Questions are being raised about the Big Four\u2019s competitiveness, standards and conflict of interest between their business divisions. \u201cIf the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective,\u201d said Andrew Tyrie, the chairman of CMA.<\/p>\n<p>The competition watchdog will closely examine three main areas\u2014 resilience, choice and incentives.<\/p>\n<p>Firstly, it will look at the role of the Big Four in terms of market resilience and explore the notion that these firms are \u201ctoo big to fail\u201d. Secondly, it will examine why large UK companies almost exclusively instruct the Big Four as auditors despite competition and whether businesses have the ability to choose and switch auditors. Thirdly, as directors rather than shareholders pick their auditors, CMA will see if that results in lack of incentive to produce performance reviews that challenge the organisation.<\/p>\n<p>After the collapse of Carillion early this year, two select committees of MPs gave a damning report accusing the Big Four of running a \u201ccosy club\u201d. In the decade leading up to its demise, Carillion paid the four accounting firms \u00a372 million. MPs from both the Business and the Work and Pensions Select Committees accused KMPG of being \u201ccomplicit\u201d in signing off Carillion\u2019s \u201cincreasingly fantastical figures\u201d.<\/p>\n<p>Rachel Reeves, chairperson of the Business Select Committee, accused the Big Four of having a \u201cparasitical\u201d relationship with companies they were supposed to audit and urged the CMA to end their \u201cstranglehold\u201d by forcing them to break up. \u201cThe collapse of Carillion was only the latest sign of a broken audit market. Investors are losing faith in the quality of accounts and the lack of meaningful competition creates conflicts of interest at every turn,\u201d said Reeves.<\/p>\n<p>Along with loss of faith in the big accountancy firms, the collapse of high-profile corporates has also undermined confidence in the UK\u2019s audit watchdog, the Financial Reporting Council (FRC). The FRC is itself under government review over its competence and whether it is \u201cfit for the future\u201d.<\/p>\n<p>The FRC had severely rebuked KPMG, which earned about \u00a31.5 million per year for signing off Carillion accounts. Thousands of jobs had been lost when Carillion collapsed and a subsequent parliamentary report found that Deloitte, which received \u00a310 million to be the outsourcing company\u2019s internal auditor, had been either \u201cunwilling or unable\u201d to identity failings in financial controls, or \u201ctoo readily ignored them\u201d.<\/p>\n<p>In June, it had fined PwC a record \u00a36.5 million for failing on its audit of BHS two years before the retail giant collapsed. In October, the FRC had set out a series of possible reforms, including banning the big accountancy firms from earning lucrative consultancy fees from companies they were also auditing.<\/p>\n<p>\u201cAudit plays a vital role in underpinning confidence in the capital markets and it is essential that the sector rem\u00adains competitive and resilient enough to maintain high quality standards. I have been honest that the industry faces challenges,\u201d said Bill Michael, KPMG chairman, who had stunned competitors by admitting the Big Four was an \u201coligopoly\u201d.<\/p>\n<p>While Michael accepted that \u201cwe all want to build trust in corporate Britain\u201d, he opposed the idea of forcibly separating audit from non-audit activities, arguing that there were \u201cclear benefits to audit quality and the capital markets by being a multidisciplinary firm\u201d.<\/p>\n<p>Another reaction came from Stephen Griggs, head of audit at Deloitte, who said: \u201cWe are supportive of measures that encourage choice as well as a robust audit market and welcome the CMA\u2019s study. Achieving this will be complex and any future framework also needs to include a focus on audit quality across all listed companies.\u201d<\/p>\n<p>The CMA has identified potential measures to address the problems. They include:<\/p>\n<ul>\n<li>Increase competition between the Big Four. Maybe impose possible restrictions on audit firms providing non-audit services.<\/li>\n<li>Increase competition from non-Big Four firms. The CMA is considering measures to reduce barriers for non-Big Four firms to build capacity. It will also consider public calls for the break-up of the Big Four into smaller firms.<\/li>\n<li>Improve incentives. This includes potential measures to break the link between company management and auditors in order to improve auditor independence\u2014for example, making the auditors accountable to an independent institution other than the company.<\/li>\n<\/ul>\n<p>The competition watchdog has also pointed out that any measures suggested by the market study would also have to be introduced on an international basis to be most effective. \u201cIf the UK were to implement the measures in isolation, then it could significantly impair the capability of UK-registered audit firms to audit global companies,\u201d said the CMA in a consultation document.<\/p>\n<p>The Competition Commission (CC)\u2014the CMA\u2019s predecessor\u2014last looked into statutory audit services in 2013 and implemented a package of remedies following its detailed market study. The CMA will draw upon the CC\u2019s work and take it to the next level.<\/p>\n<p>The CMA, which began its review in early October, hopes to have its pro\u00advisional findings by the end of 2018 at the same time as the separate independent review of the FRC. The New Year could see huge changes in the way accounting and auditing firms are allowed to function.<\/p>\n<\/div><\/div><\/div><\/div><\/div><\/div>\n","protected":false},"excerpt":{"rendered":"","protected":false},"author":2,"featured_media":57933,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_jetpack_memberships_contains_paid_content":false,"jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false}}},"categories":[105],"tags":[56060,56061,56063,56062,46125],"jetpack_publicize_connections":[],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"https:\/\/d2r2ijn7njrktv.cloudfront.net\/IL\/uploads\/2018\/12\/02172402\/BHS.jpg","_links":{"self":[{"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/posts\/57930"}],"collection":[{"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/comments?post=57930"}],"version-history":[{"count":0,"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/posts\/57930\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/media\/57933"}],"wp:attachment":[{"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/media?parent=57930"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/categories?post=57930"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.indialegallive.com\/wp-json\/wp\/v2\/tags?post=57930"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}