๐Ÿ”’ How to clean up dirty Big Four: ‘Let investors choose auditors’

EDINBURGH โ€” The Big Four audit firms – KPMG, EY, Deloitte and PwC – have been hit by repeated waves of scandal over several years, yet they continue to rake in juicy fees by milking big corporates through a variety of professional services fees. The authorities in the UK are trying to figure out how to get these global beasts to clean up their act without unsettling markets. Accountancy Age reports that a legal expert reckons the answer is to get investors to choose auditors, rather than allow companies to choose the auditors who will check up on them. This makes a lot of sense; for now, it is a case of the fox guarding the hen house. – Jackie Cameron

By Thulasizwe Sithole

The only way to solve the crisis of confidence in Big Four auditors is to empower investors to choose firms. That’s according to John Coffee, Professor of Law at Columbia University, who was speaking at anย ICAEW conference looking at financial scandals past and present.
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Accountancy Age reported on his comments, noting that theย Professor of Law at Columbia Universityย was able to bring an international perspective to auditing failures in the UK and elsewhere.

โ€œWith more accountants per capita in the UK ‘by a long margin’ than anywhere else in the world, he said it was perhaps no surprise that the issue had been a source of such debate,” Coffee reportedly said.

Scandals includingย Carillionย earlier this year have called for drastic measures including a break-up of the Big Four which dominate the audit market, highlighted Accountancy Age.

“Coffee said the key to successful reform is making the auditors more accountable to investors. He proposed a system where audit firms, on a client-by-client basis, received a grade of 1-5 (with no grade being allocated to more than 30% of those assessed).

“Investors could then be asked to vote on which firm they wanted to do the audit. They would be armed with more information than they have under the current system.

“Coffee said one of the reasons audits can be less rigorous than the public would hope is that ‘public companies want their auditor to cooperate so they can claim earnings growth’,” Coffee emphasised.

The needs of investors and the management team may be different, in that case, said Coffee, referring to this as โ€œthe dark side of audit.โ€

“While historically, shareholders might have taken on a passive role, Coffee said that the rise of the institutional investor has meant that many will take a keen interest in the workings of the company. Armed with the right information from the grading, they could choose the best auditor for the job.”

One of the proposals put forward in aย CMA market study was imposing a joint audit regime, to include at least one firm outside the Big Four in each audit, notes Accountancy Age. But Coffee was not convinced the Government deciding who should audit a company is the best solution.

โ€œThe current proposals are looking to the government, but instead of doing that, you might look to shareholders to have a little more say in the process,โ€ he told the audience.

Also announced this week was a new Government enquiry into the scope of audit. It will be led by Donald Brydon, who is currently chairman of the London Stock Exchange Group, Accountancy Age added.

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