There now exist four major accountancy/auditing firms in the UK. Until the late 20th century the market was dominated by eight networks, but this gradually coalesced due to mergers and the 2002 collpase of one firm (following its involvement in the Enron scandal) into the ‘big four’ in the 21st century. The big four now audit 99% of the companies in the FTSE 100, and 96% of the companies in the FTSE 250 Index. Those comprising the big four are: Deloitte, PricewaterhouseCoopers (PwC), Ernst and Young (EY), and KPMG. Figures for fiscal year 2018 for these four are revealing:
Deloitte: Revenues = $43.2bn; Employees = 286,000; Revenue per employee = $150,943; HQ in UK.
PwC: Revenues = $41.3bn; Employees = 250,930; Revenue per employee = $164,588; HQ in UK.
EY: Revenues = $34.8bn; Employees = 260,000; Revenue per employee = $133,846; HQ in UK.
KPMG: Revenues = $29.0bn; Employees = 207,050; Revenue per employee = $139,870; HQ in Netherlands.
None of these four operators is a single firm: each is a ‘professional services network’, that is, a network of firms, owned and managed independently, which have entered into agreements with other firms in the network to share a common name, brand and quality standards.
There has been a growing concern at the power exercised by the big four accountancy firms, with many press reports that they both advise governments how best to close tax loopholes and advise firms how best to avoid paying tax. An excellent source and communicator of research in this area is Prem Sikka (follow him on Twitter and/or Facebook).
Shadow Chancellor John McDonnell commissioned a review of the ‘auditing industry’ which was published in 2018. The executive summary of this report (entitled Reforming The Auditing Industry and readily accessible on the Internet) states:
‘Auditing firms are mired in conflict of interests and have shown willingness to bend the rules at almost any cost to increase their profits. A steady parade of scandals has followed and auditors’ silence has been a major factor in loss of people’s pensions, jobs, savings and investments. Supply chain creditors and tax authorities have been forced to write-off billions of pounds a Carillion, BHS and elsewhere.The 2007-08 banking crash showed that banks crashed within days of receiving a clean bill of health from auditors. It did not encourage the industry to examine its practices and reforms were organised off the agenda. The regulators are captured by the auditing industry and poor quality of audit work is the inevitable outcome. They have failed to check predatory practices, improve audit quality, mount speedy and thorough investigations of audit failures, apply effective sanctions against auditors delivering poor audits, or develop any schema for public accountability of the auditing firms.’
The big four stay in business, the report concludes, ‘because the audit market is guaranteed by the state and regulators do nothing.’ It is an industry that sets ots own standards or benchmarks which are only too often ‘the lowest common denominator’: ‘a culture of profit maximisation has resulted in inadequate time budgets, irregular auditing practices, offshoring (or outsourcing) of audit work and reliance upon work performed by staff not under direct control of the firms’. The report adds: ‘firms have a history of non-cooperation with regulators’.
It might be thought that this report is unduly polite. In my ‘technical’ terminology, these predatory accounting/auditing rip-off accomplices and allies of the capital monopolists that use their capital to buy policy from the state’s power elite fully warrant the stigmatising status of ‘greedy bastards’. But it takes power to stigmatise, and stigma is much more readily weaponised against the disadvantaged, poor and vulnerable than it is against the super-rich who exploit and oppress them.
What does the report recommend? Here goes:
Auditors must act exclusively as auditors
1 Statutory auditors of large companies and other entities must act exclusively as auditors.
2 The audit business of accounting firms must be legally separate from everything else, with no cross holdings.
3 Auditors and their associates cannot sell any non-auditing services, with the exception of delivering statutory returns, to audit clients.
4 It will be a criminal offence for statutory auditors of large companies and any entities related to them to offer or perform non-auditing services for audit clients.
5 Members of the audit team cannot join the staff of the audit client for five years after ceasing to be a member of the audit team.
A Statutory auditor for the financial sector
6 The state can become the fifth largest supplier of audit services.
7 A statutory state-backed body must be created to conduct real time audits of banks, building societies, credit unions, insurers and major investment firms.
8 The statutory auditor will work closely with the financial sector regulators.
9 The financial sector regulators shall have unhindered access to the files of the statutory auditor.
Expand supply of auditing services
10 Remove all restrictions on the ownership of auditing firms in order to attract new entrants, capital, competition and choice and create pressures for improvement in audit quality.
11 Joint audits must be made mandatory for large companies, as defined by the Companies Act 2006.
Independent body for appointment and remuneration of auditors
12 An independent body to be created to appoint and remunerate auditors for all non-financial sector large companies, as defined by the Companies Act 2006.
13 Big four firm share of the audits of FTSE 350 companies must be capped at 50% of that market.
Audit market and competition
14 Large companies must be required to change audit firms, partners and entire audit staff at least once every five years.
15 Audit firm rotation must be accompanied by a ten year cooling-off period (ie the outgoing firm cannot return for another ten years).
16 Audit tenders should be publicly available.
17 The winning audit tender, in its original form, shall be filed at Companies House.
18 Collusion in any part of the audit tendering process in order to secure competitive advantage shall be a criminal offence.
19 The Competition and Markets Authority must examine the auditing industry at five yearly intervals, until such time that its structure and practices change to secure high degree of competition and choice to deliver value for money and high quality audits to protect stakeholders.
Exposure to organisational culture
20 Auditor files should be available for stakeholder scrutiny.
21 Each resolution to appoint or reappoint an auditors, and each audit report must be accompanied by the following:
- A copy of the audit contract
- A list containing composition of the audit team, the time spent by each member on the job, their qualifications and the hourly rate charged for each grade of staff
- Details of the audit work performed by staff not under the control and direct supervision of the entity signing the audit report, together with the names of the entities where the work is performed
- Percentage and significance of the audit work carried out by staff not under the control and direct supervision of the entity signing the audit report
- A statement that the auditor accepts full responsibility and liability for the quality of work carried out by staff not under the control and direct supervision of the entity signing the audit report
- A statement that the audit firm has arrangements in place to ensure that all files and staff related to the audit work, whether at the firm or at third party location, shall be made available to regulators
- A list of materially significant questions asked by auditors and diretors’ replies
- A list of regulatory action taken aganst the firm during the five previous years and the firm’s response to each action
- A list of the shortcomings in the firm’s audit procedures identified by the regulator during the previous five years and the firm’s response and commitment for dealing with each of them
22 The provision of false or misleading information would be a criminal offence.
Reforming auditor liability
23 Auditors must owe a ‘duty of care’ to individual stakeholders who have a reasonable justification for placing reliance upon auditors.
24 The incidence of liability must act as a pressure point for improvement of audit quality. Individuals and society must be empowered to seek redress from negligent auditors.
25 There must be personal liability for audit failures upon partners responsible for audits.
26 Where a partner of the audit firm acts negligently, fraudulently or has colluded in the perpetration of fraud and material irregularities, civil and criminal liability must fall upon the partner or partners concerned and upon the firm jointly and severally.
27 Class lawsuits must be permitted to empower stakeholders as many stakeholders are not always in a position to seek redress from negligent auditors.
28 In the event of negligent and fraudulent practices, audit fees for the relevant years shall be returned to the audited entity.
Accounting for accountancy firms
29 Auditing firms must not be permitted to write their own accounting, auditing and financial reporting rules.
30 Auditors and auditees must not collude and fix financial reporting and auditing rules for LLPs
31 Accounting trade associations must or be permitted to write accounting rules for businesses controlled by their members.
32 Auditing firms must provide socially useful information about their operations, including information about their offshore links, captive insurance companies, political links, audit failures, cooperation with regulators, regulatory action, lawsuits and profits from predatory practices.
33 The contents of financial and transparency reports must form part of a revised Companies Act, or equivalent legislation, so that the requirements can be enforced to secure consistency and empowerment of stakeholders.
Regulatory structures
34 No statutory regulatory powers for accountancy trade associations acting as the Recognised Supervisory Bodies.
35 No statutory regulatory powers for the Financial Reporting Council.
36 All aspects of the UK company law, including accounting and auditing, to be overseen by the Companies Commission. I will licence auditors and monitor audit quality.
37 Societal stakeholders to have presence on the Companies Commission.
38 The entire regulatory structure to be the subject of freedom of information laws.
39 Accounting standards must be set by Parliament and emphasise prudent accounting practices.
40 Accounting standards must meet the needs of stakeholders.
41 The Companies Commission shall provide guidance on the accounting principles set by Parliament.
42 All accounting standards must be stress tested to ascertain their effects.
43 Auditor duties to be clarified by a revised Companies Act.
44 Auditing standards must be formulated by the newly established Companies Commission.
45 Auditors shall approach each audit with an inquiring mind and design audit tests to determine whether financial statements are free from fraud and material irregularities, and report the matter to regulators.
46 Auditors shall have a statutory duty to design audit tests to determine whether the auditee is a going concern at the date of the balance sheet.
47 Legislation shall be enacted to give regulators powers to implement a greater range of sanctions against auditors delivering persistent low quality audits. These can include banning firms for a specified period from securing new clients and the possibility of closure.
48 No further jurisdictions shall be awarded to auditing firms until they have addressed the quality gap and shown ability to deliver high quality financial audit.
49 The provision of false information to regulators and stakeholders shall be a criminal offence.
It will be appreciated that this detail reflects and compensates for the fact that I am not an accountant. I am hugely indebted to Prem Sikka and his colleagues. But there are lessons: (a) it often takes painstaking attention to detail to prepare the ground for, and to secure, effective policy changes; (b) policy changes are an important component of what I have commended as a strategy of ‘permanent reform’, targeting and keeping within our sights the kind of revolutionary social transformation that is a precondition for any viable concept of (a ‘reconstructed’ neo-Enlightenment concept of) the good society (that is, to cite Shelley, a society for the many and not the few); and (c) the idiot Gove notwithstanding, expertise matters.