"I know a bank where the wild time blows.”
Oberon to Puck, “A Midsummer Night’s Dream” (II, i, 250)
With a minor tweak to update Shakespeare’s Elizabethan orthography, Oberon’s invitation to mischief captures the Bank of England’s intention to seek tenders for its audit, done since 2006 by KPMG.
Who knows about the whispering in the back corridors of power, but no issues of dissatisfaction or performance have been displayed in public. So for now it is safe to see the process as another insubstantial solution in superficial search for a non-existent problem.
Readers here know my skepticism on mandated auditor replacement -- as expanded in my recently-published “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms” – that it is an ill-considered, highly disruptive and above all unproven non-fix for the quite legitimate but intractable issues of audit quality.
That is, there has never been a showing that auditor tenure is in any way related to audit quality – much less as a matter of causation. Lacking actual evidence or even a decent empirical study, it has been foisted by regulators -- mistakenly believing that motion can be sold as progress, and heedless of the unintended consequences. At the same time, the challenge of finding replacement auditors in the Big Audit sector is already problematic, across examples from BT’s struggle to replace PwC on the heels of the scandal with its subsidiary in Italy, to Toshiba’s currently fraught relationship with PwC after EY’s scandal-driven sacking in 2016.
The dynamics of the Bank’s call for tenders will be interesting, to say the least. To start, it is clear that no firm will be motivated to act for the fees involved. With the Big Four’s global revenues in 2016 averaging over $ 30 billion apiece, it would be generous to describe as inconsequential the Bank’s payments to KPMG in 2016 -- £ 262,000 for the audit and £ 327,000 for other work.
In the politicized environment of the City of London, however, proximity counts mightily. Outward through the Bank’s revolving door, for example, passed its John Milne to EY in 2014, and Andrew Bully to Deloitte in 2016. Meanwhile, Deloitte consulted for the Bank on its Value for Money review in 2013 and the disruption to its Real Time Gross Settlement System in 2015, while EY is to provide an assurance report on the compliance of the Bank’s SONIA interest rate benchmark reforms with IOSCO’s principles for financial benchmarks.
As KPMG is expected to re-tender, the intensity of its competition will be measured by the appetite of the other Big Four to foreswear those non-audit opportunities, with their associated and decidedly low-risk cachet, to take on the potentially poisoned chalice of the statutory audit.
Sky News put it on November 5 that “Critics of the big auditors are likely to press for the work to be handled by a firm which has not been tainted by regulatory findings.” The politically-minded will see shadows over KPMG in the criticism it has attracted for, among others, its work for the Gupta family interests in South Africa and its role as auditors for the collapsed HBOS as examined and passed – so far at least – by the Financial Reporting Council.
Yet that firm’s exposures are hardly unique. There are no large firms not proximate to serious charges of corporate malfeasance. Each of the Big Four is so burdened; no listing here is needed -- the outcry “Where were the auditors?” echoes around the world.
A first-order question is the degree of compromised virtue that will be tolerable in the tender process. And a realistic follow-up is this: “How long before any or all of the Big Four are tarred afresh by the inevitable outbreak of large-company financial wrong-doing?”
In the end, this optics-driven tender exercise in the City of London reveals the Old Lady of Threadneedle Street – known for the Bank’s headquarters address since 1734 – as an inconstant and irascible biddy.
Leadership of the Big Four might reasonably ponder the desirability of wooing her and soliciting her favors – as well as the cost of succeeding.
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