Unpacking the global financial scandal nobody’s talking about

EDINBURGH — The Big Four accounting giants survived the global financial crisis, yet they had a hand in it. The Guardian, a respected global website and newspaper based in the UK, produced a feature earlier this year in which it unpicked what it calls the financial scandal no-one is talking about. Its journalist, Richard Brooks, outlines how accounting used to be a boring, easy job aimed at helping the rich count their booty, but it has metamorphosed into a highly lucrative industry that has eaten into the healthy parts of a capitalist system. – Jackie Cameron.By Thulasizwe Sithole.Accountancy used to be boring – and safe. But today it's neither. Have the 'big four' firms become too cosy with the system they're supposed to be keeping in check? That's the big question asked by The Guardian newspaper..In an in-depth feature, writer Richard Brooks unpacks the worst financial crisis in decades – one that most of the business community and regulators have been ignoring. It is a story that starts with a reflection on how it is that auditing giant Ernst & Young remained unscathed after too-big-to-fail Lehman Brothers collapsed in 2008, a shock that played into the global financial crisis..___STEADY_PAYWALL___."After the fall of Lehman Brothers brought economies to their knees in 2008, it was apparent that Ernst & Young's audits of that bank had been all but worthless. Similar failures on the other side of the Atlantic proved that balance sheets everywhere were full of dross signed off as gold. ."The chairman of HBOS, arguably Britain's most dubious lender of the boom years, explained to a subsequent parliamentary enquiry: 'I met alone with the auditors – the two main partners – at least once a year, and, in our meeting, they could air anything that they found difficult. Although we had interesting discussions – they were very helpful about the business – there were never any issues raised.'".This insouciance, says Brooks, typified the state auditing had reached. "Subsequent investigations showed that rank-and-file auditors at KPMG had indeed questioned how much the bank was setting aside for losses. But such unhelpful matters were not something for the senior partners to bother about when their firm was pocketing handsome consulting income – £45m on top of its £56m audit fees over about seven years – and the junior bean counters' concerns were not followed up by their superiors.".Read also: Inside world's financial underbelly, with warnings on Bitcoin, ICOs and Malta.Half a century earlier, continues the writer, economist JK Galbraith had ended his landmark history of the 1929 Great Crash by warning of the reluctance of "men of business" to speak up "if it means disturbance of orderly business and convenience in the present". (In this, he thought, "at least equally with communism, lies the threat to capitalism".) Galbraith could have been prophesying accountancy a few decades later, now led by men of business rather than watchdogs of business.".Brooks underscores that accounting was once a fairly rudimentary process of enabling the powerful and the landed to keep tabs on those managing their estates. "But over time, that narrow task was transformed by commerce. In the process it has spawned a multi-billion-dollar industry and lifestyles for its leading practitioners that could hardly be more at odds with the image of a humble number-cruncher.".Just four major global firms – Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY) and KPMG – audit 97% of US public companies and all the UK's top 100 corporations, verifying that their accounts present a trustworthy and fair view of their business to investors, customers and workers, he reminds his readers. ."They are the only players large enough to check the numbers for these multinational organisations, and thus enjoy effective cartel status. Not that anything as improper as price-fixing would go on – with so few major players, there's no need. 'Everyone knows what everyone else's rates are," one of their recent former accountants told me with a smile. There are no serious rivals to undercut them. What's more, since audits are a legal requirement almost everywhere, this is a state-guaranteed cartel.'.Read also: Warning: World is not safer after 2008 financial crisis – FT."Despite the economic risks posed by misleading accounting, the bean counters perform their duties with relative impunity. The big firms have persuaded governments that litigation against them is an existential threat to the economy. The unparalleled advantages of a guaranteed market with huge upside and strictly limited downside are the pillars on which the big four's multi-billion-dollar businesses are built. They are free to make profit without fearing serious consequences of their abuses, whether it is the exploitation of tax laws, slanted consultancy advice or overlooking financial crime," continues The Guardian..Conscious of their extreme good fortune and desperation to protect it, accountants distract critics by highlighting how business can be tough for them. "The environment that we are dealing with today is challenging – whether it's the global economy, the geopolitical issues, or the stiff competition," claimed PwC's global chairman Dennis Nally in 2015, as he revealed what was then the highest-ever income for an accounting firm: $35bn. The following year the number edged up – as it did for the other three big four firms despite the stiff competition – to $36bn. Although they are too shy to say how much profit their worldwide income translates into, figures from countries where they are required to disclose it suggest PwC's would have been approaching $10bn.".Among the challenges PwC faced, Nally is reported as saying, was the "compulsory rotation" of auditors in Europe, a new game of accountancy musical chairs in which the big four exchange clients every 10 years or so. This is what passes for competition at the top of world accountancy. "Some companies have been audited by the same firms for more than a century: KPMG counts General Electric as a 109-year-old client; PwC stepped down from the Barclays audit in 2016 after a 120-year stint.".Accountants are generally trusted to self-regulate – another area that makes them prone to "self-indulgent outcomes". "Where a degree of independent oversight does exist, such as from the regulator established in the US following the Enron scandal and the other major scandal of the time, WorldCom – in which the now-defunct firm Arthur Andersen was accused of conspiring with the companies to game accountancy rules and presenting inflated profits to the market – powers are circumscribed. When it comes to setting the critical rules of accounting itself – how industry and finance are audited – the big four are equally dominant. Their alumni control the international and national standard-setters, ensuring that the rules of the game suit the major accountancy firms and their clients," says The Guardian..Tomorrow: How governments have aided and abetted the greedy Big Four

Unpacking the global financial scandal nobody’s talking about

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