Governance Watch - Issue 30

by Dina Medland in London


It is a little difficult to consider something to be a ‘radical’ idea when it was first proposed seven years ago, in the immediate shadow of the financial crisis – to no avail. A snapshot of business media headlines cast a light on some of the complexities as well as the powerful forces at work that can prevent truly radical ideas from becoming reality.

In 2011 BBC News ran a story headlined European Commission Proposes Breaking Up Audit Firms. Last week the Financial Times labelled a call by Stephen Haddrill, CEO of the accounting regulator the Financial Reporting Council (FRC) for an inquiry into forcing the Big Four to spin off audit from consulting to be a “radical idea.” The very next day the Times ran a story headlined Regulator under pressure as Big Four battle plans for reform.

 “Accountancy firms and the FRC have faced growing criticism from Westminster after the collapse of Carillion, BHS and other companies. However, senior figures in the accountancy industry, who have been rattled by the criticism, feel that the credibility of the profession is being undermined by the FRC’s weak response to corporate collapses, rather than the dominance of the Big Four” The Times reported. 

It quoted Prem Sikka, accounting professor at the University of Sheffield, as saying: “The FRC U-turn is just a camouflage for its own failures.” The story ended by saying in reference to Mr Haddrill’s interview with the FT: “An FRC spokesman yesterday appeared to backtrack, telling The Times that Mr Haddrill’s comments were not a policy statement by the FRC.”

Clearly a great many people are “rattled.” 

There has also been a significant amount of media coverage and opinion expressed in a just a few days, exploring the ramifications of a ‘break-up’ of the Big Four.

The ICAEW blog begins: “There is a convenient syllogism to which all of us are prone – you may recognise it yourself. It goes ‘Something must be done. This is something, therefore we must do this.’ It is perhaps in this light that we are currently hearing more calls to ‘break up the Big Four’”. Further along, it goes on to say: “The other justifications put forward for breaking up the market, such as the conflict with consultancy work, are already dealt with under the FRC’s own ethical standards for auditors – the success of which can be shown by the fact that in no cases of alleged audit failure has conflict been claimed as a reason.”

Grant Thornton’s blog has Jake Green giving a personal view: “we should be looking into ways to move to a model where the shareholders are essentially choosing the audit firm.”

In the FT, Jonathan Ford argues for greater shareholder pressure for higher standards such as fuller disclosure.

The PR firms have also been working overtime. City AM highlights some of the opportunity with Something has to happen’: How the Big Fours crisis provides a unique opportunity for Alvarez & Marsal. 

The week before the FT interview with the FRC CEO, the paper’s own story highlighted a report by the International Forum of Independent Audit Regulators (IFIAR) identifying serious problems at 40% of the audits they inspected last year, with accounting lapses identified at two-fifths of the 918 audits of listed public interest entities inspected. It is clear this is not just a British problem.

As you might expect, the FT has given this issue of how to move forward on audit a great deal of coverage, with opposing views reflected. Its own view is: “The Financial Times has repeatedly argued that more competition is needed, and backed remedies up to and including a break-up of the Big Four.”

Now it is opening up the debate on whether the Big Four should be broken up to the public and asking for opinions, sent in by Sunday, with publication of a selection of the best responses next week. 

Where this debate goes will be watched with great interest by those in business keen on much better corporate governance not only in the UK, but across the globe.

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