UK Big Four Accountants Face Possible Ban: Time for a New Approach?

A Reuters news report caught my attention recently. It focused on an analysis of the UK accounting watchdog, which announced it might ban firms from providing consultancy work to those firms whose books they audit.

There have been many examples recently, such as the collapses at Carillion and BHS, that have lead the Financial Reporting Council (FRC) to the point of announcing a new “strategic focus” to ensure that financial audits are better serving the public interest.

We all know that the Big Four accountants provide lucrative consultancy work to the same firms for whom they perform financial audits. This has always seemed to be a conflicted arrangement to me, because, in some companies at least, there may not be the correct level or ability to challenge organisations who are so tightly embedded. This in itself is not news, what is new, however, is the seeming determination of the regulator to recognise the issue and to get tough.

An example of this toughness came in June of this year when PwC was fined a record 6.5 million pounds by the FRC for failing to flag its concerns about BHS. Its lead partner recorded only two hours work on the audit, but 31 hours on non-audit services.
The FRC didn’t pull any punches either; their statement made their feelings quite clear: “The review will include determining whether further actions are needed to prevent auditor independence being compromised, including whether all consulting work for bodies they audit should be banned.”

The FRC is reportedly looking to toughen up requirements for auditors to determine if a company is correct in stating it is a going concern, meaning it has enough resources to continue in operation for a year or more.

The FRC’s proposals aim to address criticisms that the Big Four don’t face enough competition. A Financial Times article from earlier this year discussed this issue, citing a parliamentary report that urged the competition watchdog to consider breaking up the Big Four, saying they operated as a “cosy club incapable of providing the degree of independent challenge needed.”

Bill Michael is the chairman of KPMG’s UK business, made some interesting comments on this topic back in May, when he said that KPMG had been thinking about break-up scenarios “for some time” as the current business model of the Big Four is “unsustainable”. He went on to say, “We are an oligopoly - that is undeniable,” - “I can’t believe the industry will be the same [in the future]. We have to reduce the level of conflicts and . . . demonstrate why they are manageable and why the public and all stakeholders should trust us.”

One of the questions that the Big Four's customers are increasingly asking is if a Big Four accountancy firm can provide the bespoke and independent review of their business that delivers value for money.

I think there has been a degree of complacency with the Big Four accounting and auditing firms; they, for example, they have for some time lived in a world where customers are compelled by law to buy their auditing product.

They also benefit from the perception that “no one gets fired for buying IBM” and in some cases perceived kudos of dealing with only the big names. I question though, in this increasingly customer-centric and regulated environment that we all operate in, does this structure promote quality, or does it encourage box ticking?

In these times in which businesses are fighting to secure their future, I believe we may well have hit a tipping point where companies are seeking more value led, independent consultancy and advisory services. Being all things to all men is clearly an unsatisfactory business model, but it has served the Big Four very well but is in my opinion (and increasingly that of the regulator) well past its best before date.

Meanwhile, many of Fifth Step’s clients who have dealt with the Big Four previously are a testament to the benefits that an independent, sector-focused firm such as Fifth Step offer, including a superior level of customer service and business responsive flex up or flex down services that adapt to your business requirement. It is time to move away from a one size fits all approach to a tailor-made couture strategy where quality, rather than entitlement, is the winning strategy.