November 3, 2018 0

Potential breakdown of the Big 4

Potential breakdown of the Big 4

The breakdown of Big4 is in discussions but should they actually be divided? Many have said yes as separating auditing from consulting would simplify financial affairs as there would be no conflict of interest. Auditors are not successful investors anymore. The current situation has become so intense that the heads of the top four firms have considered forcing audit firms to outsource their consulting work. Splitting up the big four accounting firms, which are PwC, KPMG, EY and Deloitte is only the first step. The reform can only be brought about if the auditors work for shareholders and not the management.

The role of the auditors; expectations vs. reality

Auditors are required to sustain their trust and faith in financial markets. Major stock markets have mandated that the listed companies hire auditors to verify their accounts for authenticity. This is to reassure the shareholders that their capital is well-protected and material matters have been checked. The numbers have to portray a true and fair account of the circumstances and income which has to be prepared in accordance with financial standards and the prevailing company law. But audit is not up to the mark and is failing the expectations of the investors.

The problem here is that audit is not helping the principal beneficiaries who are the shareholders. It is becoming difficult to differentiate between good and bad audits. Even with all these issues surfacing, most of the shareholders are choosing to retain auditors whether they are delivering results or not. This lack of examination of the problems has created a conflict of interest. Most auditors feel more accountable to executives rather than shareholders, and as a result do not oppose them. These conflicts are blown out of proportion when the audit firms divest some of their services to management teams especially when their work is more lucrative for them. The superior position of the Big Four in large company audits is another problem. When powerful and dominant firms crowd out high quality competition, jarring damage is caused. To know more about this in detail, find an accountant who could also take care of your accounts and books.

These problems have clubbed together to create a maladjusted audit market. To freshen up the space, separating audit from consulting seems like a viable option. As non-audit work fetches auditors around 80 percent of their fee income, auditors hope to gain more non-audit work by sacrificing more audit work. This is subject to the limitations on consulting work. But shareholders are not obligated to accept any of these reasons as excuses for non-performance and sub-standard accounts. Auditors are required to provide transparent and meaningful disclosures about the risks they undertake. They should take care to verify the company accounts do not overstate capital and do not show manipulated figures.

Shareholders to have a say

The relationship between shareholders and auditors should be enforced in such a way that shareholders have the upper hand. Shareholders have to scrutinise the accounting and performance of the auditors. They have the power to remove auditors or audit committees if they deliver mediocre results. They have to stress on quality accounting and impose meaningful sanctions.

The impacts of the Big 4 Split

Another side argues that the breaking up of the four firms would actually hurt performance. The separation of the non-audit services would neither increase competition nor help smaller competitors. The division of the management and advisory services would degrade their performance further and result in financial deterioration which would rid them of the ability to service their clients. The theory that competition and options of the Big Four would increase if the split happens is highly superficial. Forcing them to divest their non-audit businesses would not create any new auditors. Although competition concerns have been reported by the UK regulator, the main problem is global. The expansion of the Big Four, conducting business in more than 100 countries, is mainly because of their conformity to client’s needs for global atmosphere and specialised industry expertise.

There is a huge competitive gap between the Big Four and their smaller counterparts. The smaller concerns lack the auditing acumen and skills of the Big Four and have less risk tolerance. Because of this one of these firms can never outbid one of the giants. But when competition intensifies between the giants, things get complicated. This was seen when Toshiba chucked PwC’s services and chose to work with EY only to start having disagreements with the latter. This led to late submission of financial statements and a below par audit report. On top of all this, Toshiba ran out of other options as there was rivalry between the other two giants, Deloitte and KPMG. It shows that competition and choices are not on the same side anymore. Splitting auditing from advisory work is a potential answer to the problem but there are limitations in the form of disallowing firms to sell their services to audit clients. This completely disregards concerns about existing conflicts of interest.

To Summarize

The world is evolving constantly and the split up will fail to recognise this aspect. The advent of artificial intelligence and robotics is changing the way information is collected and verified. Auditors will need more expertise. The fact that different processes are becoming more and more complex, auditors need all the help they can get. They will need to have scale and financial strength along with the necessary skills. Splitting up the Big Four will achieve nothing if they don’t succeed and are replaced by subsidiary units. Auditors should own up to their mistakes and deal with complex situations. A full-blown amputation is not the solution here but rather a complete re-engineering of the entire model.

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