Is It Time To Cut The Big 4 Down To Size? Breaking the Auditing Monopoly!
Jacques van Wyk
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When it comes to reputations being dragged through the mud thanks to significant ethical violations by its practitioners, no other profession in the world comes close to the auditing profession.
Following a string of global scandals over the past decade or so, international calls for reform are getting louder and louder. Both business and political leaders are trying frantically to stave off a crisis of confidence in the accounting industry that could have devastating ramifications for global capitalism as a whole.
Which is, to be brutally honest, lurching from one Big 4 audit scandal to another.
The rot is pervasive.
Following the filing for bankruptcy of British multinational construction and facilities management services company Carillion in 2018, heated debates over whether too few auditing firms were auditing too many companies in the UK were rife.
In 2017, only three of the 500 companies on the S&P 500 index didn’t use the auditing and consulting services of one of the Big Four. That’s a 99.4% market share. On the London Stock Exchange in 2018, all top 100 companies were audited by one of the Big Four. And in South Africa, 96% of all companies listed on the JSE are audited by one of the Big Four firms.
Studies into the Carillion saga showed that, in a complete disregard for internal controls, the company’s accounts were systematically manipulated so that assessments of revenue were always optimistic. The audit company concerned had been Carillion’s auditor for almost 20 years. It was paid ￡29 million for its services but did not once qualify its auditing opinion, simply signing off the bizarre figures presented by the directors.
In India, actions by Big 4 firm Deloitte, and a KPMG affiliate BSR and Associates, inspired the government to apply for a five-year ban on their services for aiding the alleged financial fraud at the domestic firm Infrastructure Leasing & Financial Services. The company’s near collapse under mismanagement in 2018 triggered financial contagion fears. It was later placed under government control.
Although the banning application was later quashed by Indian courts, Deloitte’s term as an auditor ended in 2018, while BSR resigned voluntarily in June of the following year.
In South Africa, KPMG, another Big 4 audit firm, was embroiled in a disturbing scandal after it emerged they had allegedly helped the now disgraced Indian-origin Gupta family (once called South Africa’s shadow government) evade taxes and indulge in corruption during all their high jinks surrounding the state capture issue.
Although KPMG denied any willful abetment of anything criminal, they did admit to “missing several red flags” regarding the family’s accounts.
Eight senior KPMG South Africa officials were forced to resign as a result, including its CEO, Trevor Hoole.
Partners In Crime
There are so many more examples of fraud and “accounting irregularities” involving all of the Big Four auditing firms – Deloitte, Price Waterhouse Coopers, Ernst & Young and KPMG. Some company scandals actually involved all four at once!
In their report for Open Secrets entitled “The Auditors: Corporations and Economic Crime Report,” Michael Marchant and Mamello Mosiana write:
“Each of the Big Four acted as external auditors for Danske Bank at some point between 2010-2014. This was the period in which the bank was used to launder 200 billion euros for organised criminals and authoritarian governments in Eastern Europe. They all gave unqualified audits.”
Sadly, we only have time and space here to show you the very tip of what everyone suspects is a ship-sinking iceberg.
And yet, despite the many, many scandals, all four firms continue to operate and make their millions. It’s true we’ve seen the odd slapped wrist, and there have been a couple of high-profile resignations in the wake of scandals coming to light. But nothing has yet been done that actually alters the seemingly impenetrable dominance of this auditing oligopoly.
But the influence of the Four goes beyond mere auditing. Increasingly, they’re also undertaking consulting work for their clients, as well as for governments – including on matters such as nuclear energy and military spending. This creates clear conflicts of interest on so many levels, but memberships to professional bodies and charters of accountants, along with the appearance of regulation, give them what Marchant and Mosiana so aptly call a “veneer of legitimacy.”
So, where do we go from here?
It’s clear that companies need more choice.
“We need to break the oligopoly that is the Big 4, although that’s easy to write and hard to enact,” says Angus Dent, a leading UK chartered accountant and former CFO. “Only with choice is there competition and the audit service that the paying companies and users of the accounts need.
“A simple start would be to say that the Big Four could only have a maximum of around sixty audits each of the FTSE 350 companies – that would spread things around and force some of the smaller FTSE 350 companies to seek the services of other audit firms. Two years later, the number of these audits that can be conducted by the Big Four could be dropped to forty each and so on.”
According to Angus, this would force more effective competition, and give the bottom half of the top ten auditing firms an incentive to invest in technical departments, knowing they would get enough work to make it worth their while.
There are also legislative changes afoot.
Mandatory audit firm rotation will come into effect in South Africa on 1 April 2023. This new South African audit regulation will require audit firms to periodically (roughly every 10 years) rotate clients in an attempt to safeguard auditor independence and audit quality.
“The risk with long tenure, whether real or perceived, is that the relationship between the client and the firm becomes ‘cosy’, which could compromise auditor independence and the appropriateness of the auditor’s opinion on clients’ financial statements,” said the Independent Regulatory Board for Auditors (IRBA).
It is also hoped that that the policy will stimulate transformation in the audit profession by building the capacity of black-owned audit firms, and giving small- and medium-tier audit firms the opportunity to compete for the audits of listed companies.
The good news is that even though the policy has not yet officially come into effect, there seem to already be some positive changes.
IRBA chief executive Bernard Agulhas said he was encouraged that some audits had already rotated to a number of firms outside the big four, and also that there had been some partnering between big four and black-owned firms.
“We are very pleased to see that rotations are not limited to changing between the big four and are confident that we will see this trend continuing,” he said. “Increased access to work on listed entities will enhance the depth of experience at next-tier and black-owned firms.”
The regulator is now developing guidelines on how firms can perform joint audits to upskill mid-tier auditing firms, and how small auditors can cooperate to handle more complex company audits.
In addition, Finance Minister Tito Mboweni said an independent panel will be appointed to review the auditing profession’s practices and add any necessary legislation to deal with oversights in the industry.
Why Do We Care?
If the skullduggery that goes on within the giants of the auditing world only really results in those companies having to fire a few culpable people and take a temporary knock to their reputations, why do we care so much?
For the simple reason that this isn’t the only fallout.
Part of way the Gupta brothers could so thoroughly rob the South African economy (which has a knock-on effect for all of us) was because of the banking institutions and auditing firms that acted as middlemen for their corrupt business practices.
In addition, these new guidelines, could hopefully serve as a blueprint for action in other African countries. In Angola, for example, investigations into the corrupt activities of the dos Santos family revealed how large auditing firms and global financial institutions facilitated the looting.
We must disrupt the status quo.
If we allow the Big Four to become even larger and more powerful, effectively reforming and regulating their behaviour becomes increasingly difficult. There has to be radical change to put a stop to the involvement of these mega-firms in corporate fraud, grand corruption and more.
JGL Forensic Services is a multidisciplinary team of experienced forensic accounting and investigation professionals. We strongly believe in the rule of law and the scientific method as it applies to forensic accounting and investigation. Talk to us in confidence, and let’s work together to prevent corporate corruption and fraud.
Warm regards
Jacques van Wyk
?CEO - JGL Forensic Services