Money

KPMG/Big Four auditors: trial separations


When is the best time for auditors to book a loss? How about upfront? A succession of UK corporate scandals, including the collapse of Carillion, a government contractor, threaten the profession. Politicians — when not debating Brexit — call for the splitting of auditing functions from consulting businesses. A competition authority report, due soon, is likely to hew to the politicians’ demands.

Some have taken pre-emptive action. KPMG, Carillon’s auditor and one of the Big Four with large global practices, is reportedly mulling splitting its business. BDO, the UK’s fifth-largest accountant, has detailed contingency plans for a similar move.

Such steps are welcome. The UK claims a global lead in exporting financial services. A restructuring would show accountants are competitive and transparent. All the better if the industry sets the agenda.

The Big Four recognise that reforms are essential. They audit 97 per cent of FTSE 350 companies. Clients rarely buy consulting and auditing from the same firm. That can turn the Big Four into the Big Three, Two or One. A cap on their market share would help, So, too, would mandatory joint audits, bolstering “challenger” auditors.

So far, the Big Four have resisted proposals for complete break-ups. Some objections are reasonable. One is that audits of large, complex multinationals require experts from non-audit units. But audit and non-audit functions may not necessarily require separate legal entities. An operational split — likely to be the competition authority’s minimum requirement — could improve transparency and better align incentives. Formal transfer pricing would block cross subsidies.

The Big Four gripe that unilateral UK action would create anomalies. But multilateral jawing would just kick the issue into the weeds. Accountancy networks enjoy international scale benefits but have no problem implying scandals are a local issue. The clean-up should start locally, too.

Should the Big Four audit firms be split up? Or is this solution too simplistic, given the complex needs of their largest clients.? The Lex team is interested in hearing more from readers. Please tell us what you think in the comments section below.



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