October 23, 2018

What Next For the Big 4 in the U.K.? London Is Searching

Squar Milner

A drunk, searching on hands and knees under a street lamp, tells the inquiring police, “I’ve lost my keys – over there in the dark alley.”

“Then why look here?” they ask, perplexed.

“Because the light’s better here.”

In the city of London, where the modern audit profession was born in the Victorian era, no fewer than three separate inquiries have been launched into the business and performance of the dominant Big 4 accounting firms and the fitness for purpose of their U.K. regulator, the Financial Reporting Council.

As for the chances of anything beneficial emerging, instead of detrimental unintended consequences for the stability and viability of Big Audit? There are ample reasons for doubt.

The leaders of the inquiries have set out their stalls, with their aims on full display:

  • Stephen Haddrill, CEO of the FRC, put a target on the back of the Big 4 in January, telling a parliamentary committee that, “we feel there should be more competition in the major accounting and audit area”—echoed in March in the FRC’s strategic plan (page 7): “As a regulator we cannot be content that just four large firms dominate the market for audit services.”
  • Haddrill’s invitation to the Competition and Markets Authority to investigate the prospects that the Big 4 should be stripped to “audit only” was taken up with enthusiasm by its new head, Andrew Tyrie, quoted as telling a parliamentary committee that “the ‘competition’ aspect of the Big Four is ‘certainly’ something that needs to be looked at.”
  • And the Secretary of State for the Department for Business, Energy and Industrial Strategy has triggered a broad review of the remit, structure, and performance of the FRC, under the leadership of Sir John Kingman, whose call for evidence of June 6, 2018, includes as a starting premise in its Foreword that in the Big Audit market “there are well-documented structural competition weaknesses.”

With their opening biases so declared, the approach of all three scapegoating exercises is the familiar “ready … fire … aim”—that is:

  • Detailed further admiration of issues long since fully articulated at tedious length.
  • Intense and splenetic venting and finger-pointing by the profession’s most ardent critics.
  • Re-hashing—and even possible imposition—of “solutions” already examined and found wanting for effectiveness or achievability.

Focus on these subsidiary areas will at best—and least damaging—generate bulging records of compelling irrelevance, when such foundational topics should be pursued instead as:

  • A broad-based search for consensus on the shared aspirations and goals to be served by a Big Audit function fit for modern purpose.
  • Assessment of the barriers to achievement, including candid recognition of the need to re-examine the ongoing validity and relevance of long-held beliefs of dubious current value.
  • Enlistment of the active involvement of all capital markets participants whose participation and buy-in is necessary.

The prospects do not give cause for optimism. Politicians and regulators are consistent in displaying constraints on their vision, commitment to short-term motion as a substitute for long-term progress, and readiness to apply yesterday’s tools to tomorrow’s problems.

Examples are as close to hand as the negative effect on auditor choice generated by the FRC’s 2012 requirement for mandatory re-tender, leading not to its declared goal of increased competition, but contrarily this March to Grant Thornton’s withdrawal from competing for FTSE 350 audit engagements, or the cascade of American corporate failures in the 2007-08 financial crisis despite the bally-hooed aspirations of the Sarbanes-Oxley Act of 2002.

Collectively the troika of Messrs. Haddrill, Tyrie, and Kingman has potential to run the Big Audit model headlong into the ditch, by driving toward the future with eyes staring fixedly at the road behind. If so, the dispiriting prospect is that they might manage perversely to regulate the Big 4 firms into a fatal decline to disintegration.

It will take a level of shared vision and skilled diplomacy not often seen in such a complex multiparty setting to avoid such an outcome—much less to reach what might be called success.

Jim Peterson was a senior in-house lawyer with Arthur Andersen for 19 years, leaving in 2001 to pursue his own practice and to write about the accounting profession—in the International Herald Tribune and now on his blog, Re:Balance. His book, “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms,” was published in July 2017 by Emerald Books.

Image: iStock/IakovKalinin

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