February 19, 2014 5:16 pm

Auditors escape attempts to tame them

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The Big Four have maintained a wholesome image while doing exactly what they want

Years ago, I attended a discussion at London’s Brunel Business School that brought together people who never normally met: airport managers, pub owners, healthcare workers and others from the private and public sectors.

There was a presentation from two health visitors, the nurses who see new UK parents at home after a baby is born. Their job was an ambivalent one, the health visitors said. They were there to help, but also to watch out for worrying signs – of depression or possible abuse.

That’s an awkward situation, the Brunel facilitator said. Had any of the corporate people had experience of someone who was there both to assist and keep an eye on them?

Yes, they chorused. Our auditors.

The years since have proved how different these professions are. If disasters occurred under the gaze of health visitors, they would be shamed in public inquiries and subjected to such tabloid abuse that many would never work again.

The Big Four auditors appear to thrive no matter what they do. “EY fined £750,000 for audit of Christmas hamper company,” the Financial Times reported in December, referring to EY’s role in auditing Farepak, which collapsed after 114,000 people had entrusted their savings to it.

Deloitte fined record £14m over MG Rover case,” the FT said in September after the auditor failed to manage conflicts of interest with investors who extracted an estimated £40m from the carmaker, which collapsed at a cost of 6,000 jobs. (Deloitte has won leave to appeal part of the ruling.)

PwC fined £1.4m for audit failure,” we reported in January 2012 after its UK arm had failed to discover that JPMorgan Chase, the US bank, had not properly ringfenced billions of dollars of clients’ money.

Last month the US Securities and Exchange Commission said KPMG had agreed to pay $8.2m to settle charges that it had improperly provided non-audit services to clients whose books it was auditing.

Before the 2008 banking crisis, auditors had shown a “worrying lack of scepticism” in auditing financial institutions, the UK Financial Services Authority said.

In 2002 Andersen was shattered by its role as both auditor and consultant to Enron, the US energy trader that collapsed in disgrace.

Regulators decided then that the problem was the provision of both auditing and consulting services. If a firm hoped to win a contract to install a company’s computer system or restructure its manufacturing arm, it might hesitate to expose its financial malpractices.

It was as if those health visitors were keeping an eye on worryingly unhappy babies while selling the mothers breast-milk substitute.

The US Sarbanes-Oxley Act restricted the services accountants could sell to audit clients. The firms were contrite. Their consulting arms were largely sold or spun off. PwC ran a US TV campaign showing a driver leaving a note on a car he had bashed, with the tagline “The softest pillow is a clear conscience”.

That seems a long time ago. The Big Four again have thriving consulting businesses. While their audit revenues fell $5bn over the past five years, consulting turnover has gone up $16.1bn. Their overall revenues rose to $113.8bn last year from $110.2bn in 2012.

And despite the continuing run of accounting scandals, they are lobbying furiously against significant reform. When a draft regulation suggested the European Commission was planning to order them to shed their consulting arms and limit audit relationships to as little as six years, the Big Four revolted.

It largely worked. It looks as if they will be able to carry on much consulting work, provided their fees from a client do not exceed 70 per cent of what they charge for auditing. Companies will have to rotate auditors every 10 years, with a 10-year extension if they put the contract out to tender.

I first wrote on this subject 30 years ago (equivalent to three European audit cycles, or one-and-a-half if it goes out to tender) and I am breathless with admiration for the big firms’ ability to maintain a stodgy public image while being involved in so many scrapes and for managing to grow consulting arms every time an old one is cut off.

Anyone contemplating an auditing career can be assured that this is a business that will never be tamed, let alone die. And while it may not be as socially useful as being a health visitor, it pays a lot more.

Twitter: @Skapinker

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