Adulatory commentators are treating the March 30 report of the House of Lords Economic Affairs Committee on the market concentration of the Big Four audit firms and their role in the financial crisis (here) as a call to arms not heard since King Henry’s exhortation to his troops on St. Crispian’s Eve.
While the print media played it pretty much with a straight bat (here the Financial Times, the Guardian, the WSJ and the NYT), the blogging community went into adjectives-on-steroids: “hard-hitting” (both Ian Fraser and AccountingWeb), a “watershed” (Accountancy Age), “tough, no-nonsense” (BigFourBlog) and “skewers the auditors” (Francine McKenna).
Yet soft a while. This on-high manifestation of the Lords’ work is hardly “band of brothers” material.
Truth told, other than its sound-bite charge that the auditors of the UK banks were “disconcertingly complacent” in carrying out their mission, the report is pitiably thin in substance:
Its most solid recommendation, first, is for mandatory five-year auditor rotation – an approach backed by nothing but hope for beneficial effects, and conspicuous by its adverse unintended consequences in Italy, the only major country with experience.
Second, the suggestion of “living wills,” for the relief of an audit firm in crisis, would follow the distinctly inappropriate model for rehabilitating a failing bank – which is an entirely different proposition. Bank separation of the good from the toxic involves a balance sheet of identifiable if hard-to-value assets and liabilities, to be worked through by a fungible and entirely replaceable leadership team – whereas the only value in a service-based accountancy partnership resides in its reputation and the highly-mobile skills of its people – both of which (as was shown in the Andersen disintegration) can dissipate faster than any putative rescuer can possibly control.
Third, the extent of Big Four concentration at the upper end of the audit market long pre-dates Andersen’s collapse in 2002. So the Lords’ buck-passing to the Office of Fair Trade, to re-visit yet again the age-old and insoluble matter of large-firm concentration, is hardly inspired or inspirational – especially in the complete absence of any indication of authority or vision as to how a split of resources and expertise could increase auditor choice or quality of performance.
Specifically: to split the large firms along industry lines would not increase choice. A Big Four firm depleted of its global-scale expertise in a complex sector – say, insurance or communications or defense contracting -- would have no more motivation or access to resources for a re-start than the current mid-sized firms – whose lack of appetite for the risks and challenges is already manifest.
Yet the alternative -- surgical bifurcation of existing teams of talent -- would devolve onto new firms, now smaller and weaker, all the existential challenges looming today over the Big Four themselves, along with the added burden of cost and management diversion to build duplicate centers of technical, industry, quality and risk management competence.
So on the actual content of the Lords report, it is either laughable or pathetic to invoke the image of Hercules confronting the stables of King Augeas. Instead of donning its boots and seizing a pitchfork, the Lords report holds a hanky to its delicate nose as it minces past the shit-pile, all the while whining that someone else, evidently the OFT, ought to get on with the stable boy’s dirty work.
Shame on the House of Lords committee, for a lazy approach to important issues of real substance. More shame on the observers failing to hold them to account.
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