Part Two –- to extend my June 6 look at the inability of the UK government to advance anything constructive on the troubled state of Big Audit, by which the large accounting networks provide assurance on the financial information of the world’s global companies.
The context is the May 31 release by Kwasi Kwarteng, Secretary of State for Business, Energy and Industrial Strategy, of the official Response to the Government’s consultative White Paper of March 2021, “Restoring Trust in Audit and Corporate Governance.”
As summarized -- and treated in detail in my 2019 book, “DOA: Can Big Audit Survive the UK Regulators” -- while only two topics in the Response’s 197 pages directly address auditor performance, neither can achieve positive change -- not the pending “operational separation” of Big Four audit and consulting practices, nor the proposal to mandate the intrusion of the smaller challenger firms into the audits of FTSE 350 companies by way of direct succession or “mandated shared audits.”
There must be more to the Government’s blinkered myopia, and the visible limitations on its official comprehension, than the paralysis and diversion of energy inflicted by Boris Johnson’s self-defeating struggle to assert his leadership, or even to survive in office after his party’s weakly expressed “vote of confidence” on June 6 by 211 to 148.
The Government’s Response either avoids, discounts or is often in error. Its lack of vision and aspiration will, unless relieved, continue to hobble any chance of beneficial evolution.
Put another way, public and explicit acknowledgement of at least these is necessary:
- The Government simply has no tools –- authority, magic wand or otherwise -- by which the challenger firms can be made competitive at the scale of the FTSE 350, for want of scope, resources and risk capability.
Which means, whether the critics are happy or not, that no substantive change is achievable that is not based and built upon the resources and the viability of the Big Four.
- Policy or enforcement activities with an intent or effect to “break up the Big Four” would result in a market structure that would be smaller, weaker, and less well equipped to serve the needs of today’s capital markets.
Policies instead should support the broadening, not the narrowing, of both the profession’s endorsed scope of activities and the capabilities of the firms themselves, as contemplated in Sir Donald Brydon’s December 2019 report calling for recognition of the “corporate auditor.”
- “Audit only” firms would be fundamentally weakened, if stripped of their ability to own, manage and deploy the ancillary competencies necessary to audit global-scale enterprises.
Which means that any Big Four separation of their audit and consulting practices –- as recently ascribed to both EY and Deloitte –- would not bode well, as putting at risk both their stability and the value of the current model.
- The public’s basic if mis-guided expectation, that the auditor’s “true and fair view” opinion is protection against loss of investment value, is unachievable at the level of “zero defects” audit quality.
Which means that so long as legal regimes for auditor liability admit the possibility of litigation judgements beyond the financial resources and structural capability of the large firms, a possible Andersen-style disintegration of another large network and the consequent collapse of the entire model cannot be discounted.
- The notion that the disintegration of a Big Four network under terminal litigation or other threat could be rescued by official attention is a feeble and dangerous distraction.
To the contrary, regulators and politicians alike lack both the tools and the agility to forestall another break-up on the scale of Andersen’s precipitous fall in the early months of 2002.
Modest credit given, as modestly due, the Government’s Response did avoid falling into the rabbit holes of the profession’s most rabid critics, on such clear non-starters as criminal penalties, forced legal separation of practices, or government assignment or even take-over of audit engagements.
In all, however, and well recognizing the legitimacy of the public concerns for the fitness of the current Big Audit model, an official perspective that does not acknowledge and address the significant matters passed over by the Response amounts to no more than the unfounded hope that the status quo will not be disturbed over the office tenure of the incumbents.
Such an attitude is not worthy to qualify as a program for change.
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