Kwasi Kwarteng wasted no time, upon taking office on January 8 as the UK’s new Secretary of State of Business, Energy and Industrial Strategy, in asserting that audit reform was “one of his initial priorities.”
The sounds of earnest innocence might be rather touching, from a government servant, freshly elevated from his Energy remit to become chief minder of the entire sprawling BEIS portfolio. Forbearance for a learning curve may be indicated, as reinforced by a CV that does not reveal experience with the issues afflicting Big Audit.
For the moment, however, and presuming good in Kwarteng’s intentions, queries on his earliest signals are in order. See his first Twitter message, following one of appreciation for his appointment – shouting out a £ 10 million investment to support carbon emissions reduction by the whiskey distillers (@kwasikwarteng), as “something we can all raise a glass to.”
Unfair to compare -- few glasses have ever been raised to salute the auditors, in the centuries since the invention of double-entry bookkeeping. But neither did audit reform rate a mention in the BEIS coverage of Kwarteng’s January 11 telephonic discussion of his priorities with five different British business organizations.
Post-Brexit trade relations with the EU and the state of the COVID vaccine roll-out naturally headed that list, on which audit reform did not appear – these having pre-occupied Kwarteng’s short-lived predecessor in office, Alok Sharma. Which said, the realities underlying the intense criticism of Big Audit in the UK that erupted with the collapse of Carillion in January 2018 now confront the anodyne language of the new Secretary’s introduction.
Government response is awaited to a quartet of reports – Sir John Kingman (December 18, 2018) on the manifold inadequacies of the Financial Reporting Council; the Competition & Markets Authority (April 18, 2019) on the Big Four’s audit market concentration at the FTSE 350 level; the BEIS select committee chaired by MP Rachel Reeves (April 2, 2019); and the extended inquiry by Sir Donald Brydon (December 2019) on the purpose of audit.
While the critics’ array of proposed “solutions” are shelved pending official response, further outbreaks of financial scandal and irregularities, litigation and regulatory impositions have added to the intensity of public interest – both in the UK (e.g., Thomas Cook, NMC Health, Patisserie Valerie, Autonomy) and globally (e.g., Gupta, Steinhoff, Wirecard).
What confronts the prospects and the credibility of Secretary Kwarteng, unhappily, is that he brings to the battle a distinct lack of weapons. As explored in detail in my 2019 book – “DOA: Can Big Audit Survive the UK Regulators?” (Amazon) – there is quite simply nothing in the legislative or regulatory armory that can be deployed to effect fundamental change in Big Audit as presently configured.
In summary:
- Re-engineering of the FRC, decried as “toothless and useless,” into the new Audit, Reporting and Governance Authority, is hostage to necessary legislation, and in any event is aimed not at auditor performance itself but at a regulator whose impact is at best secondary and retrospective.
- Attempts to expand competition with the Big Four, by injecting the so-called “challenger firms” into either joint or shared engagements or by actual forced re-distribution of audit mandates – neither ever justified on the basis of audit quality impact – more importantly confronts the reality of the smaller firms’ limitations in size, resources, geographic scope and risk-taking capacity and tolerance.
- Auditor changes for troubled companies, in the post-Carillion era, do not indicate optimism that those limitations are subject to relief. The replacement of Grant Thornton by RSM as auditor of Sports Direct (since re-named Frasers Group) in October 2019, after weeks of non-compliance, and the December 2020 replacement by Boohoo of PwC with the much smaller Littlejohn firm of the PKF network, do not signal endorsement that the capacity of the “challengers” is adequate to the task.
- As for the ability of the Big Four to house the ancillary skills necessary to perform audits for the world’s complex companies, in the face of calls that they should be “broken up,” the UK regulators retreated to a process of “operational separation” of the audit practices – not only because full legal separation would have been a reach too far for the UK authorities, but because the negotiated optics-oriented adjustments to the large firms’ branding, governance and internal resource deployment were readily within reach.
To emphasize – the impotence of Kwarteng and his fellows in the face of Big Audit’s intractable issues does not counsel either cynicism or despair. The world’s capital markets will continue to seek financial information assurance that is both relevant and dependable.
The Brydon report points the way, although not without heavy lifting, as Sir Donald understandably declined to wrestle with several fundamental challenges – notably the audit firms’ presently limited financial and structural stability and the related limitations of archaic rules on independence and permissible scope of practice.
One way or another, those will be solved. Perhaps by another litigation-driven collapse, as with Arthur Andersen in 2002, and replacement of the current model with newly organized and emergent suppliers. Or, desirably but much less likely, by the collective and collaborative efforts of all the relevant players to make the deep and necessary changes.
But not, it must be said, by Secretary Kwarteng. To him, as his day of reality and reckoning awaits, the best and only offer is “good luck.”
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