Re:Balance -- Jim Peterson

The CPA Pipeline: Half-Empty – Half-Full – or a Conduit No Longer Fit for Purpose?

       

  “It’s your kids. We’ve gotta do something about your kids!”

                    Doc (Christopher Lloyd), Back to the Future, 1985

 

Commentators of all stripes are alarmed at a possible impending shortage of young accountants. They cite diminishing university enrollments, declines in candidates for the qualifying examinations, the time and cost commitment for a fifth university year, and post-COVID lack of enthusiasm for the long tradition of burdensome working conditions.

The AICPA’s biennial survey of graduation rates in American universities reported a year-on-year 7.8% decline for 2022 in the number of undergraduate accounting degrees, raising concern, as put by the Wall Street Journal on October 12, “as more workers in the profession retire without an adequate pipeline of entrants to fill the gap.”

The December issue of the estimable Accounting Today pitched “the pipeline problem (as) the most vocalized concern” of its designees as the profession’s 2023 top 100 most influential people (p.16).

To address the angst and agita, the Illinois CPA Society lauunched a survey on October 5, as reported by Going Concern on October 11, “to figure out why modern day accounting students and professionals are so uninterested in pursuing the CPA credential.”  

As always prudent, scrutiny is indicated – of the history, the data, and the perspectives being put forward.

To start, history’s long view is that, going back to the invention of trade and commerce, society has recognized and valued the functions of recording, reporting and assuring its quantitative information:

• Verifying for the pharaohs the costs of pyramid construction by matching the size of the labor force with the measures of wheat on which they were fed – an early example of the still-vexing problem of fraud detection and prevention.
• Keeping the books and calculating the profits and losses for the ocean voyages and spice route caravans of the Age of Discovery.
• Inventing independent audit in Victorian England to inform the complex pools of investor capital that funded the corporations building the infrastructure of the Industrial Age – a model that survives to this day.

Those needs are evolving, not going away.

A menu of concerns is offered. The WSJ cited “more onerous workloads … pay and burnout, mundane tasks, lack of meaningful work and the threat of new technology….” 

Brutal hours, trailing compensation, dubious advancement opportunities within the firms’ partnership structures, stresses of efficiency and performance quality under the looming presence of regulators and law enforcement – the environment is fraught.

Gen Z aired a plain and simpler view, with two comments in response to the Illinois CPA survey: “Everyone knows compensation is the issue,” and “the pay is crap and the life sucks.”

Notably, however, there is nothing novel in the persistence of the Dickensian work model – the current debate on mandatory return to the office has nothing on the Victorian vision of Bob Cratchit, toiling with quill and ledger on his high stool at Scrooge & Marley, obliged to grovel for permission to spend Christmas Day with his family. 

At the same time, inquiry is called for, whether the data cited in ostensible support of the “pipeline problem” are indicative of short-term fluctuations or longer-term trends.

The WSJ article compares, for example, the 65,305 accounting graduates in the US in 2021-2022 with 51,622 in 1994-1995 – a 25% uptick over a generation, with the percentage of universities projecting next-year enrollments to be the same or higher for 2024, increasing to 75% from 58% in the prior report.

Further, Purdue University’s highly-rated undergraduate business program is reported in Accounting Today as “defying the trend and seeing accounting enrollments growing dramatically.”

So it is in order to consider the possibility that there is special pleading in at least some of the hand-wringing.

Over in the UK, Sir Donald Brydon proposed in his lucid but unfortunately disregarded December 2019 “Independent Review Into The Quality and Effectiveness of Audit,” that the future of assurance will belong to professionals whose qualifications are drawn from multiple disciplines, beyond the traditional accountancy curricula. That’s a message for the academics: declining numbers of accounting majors might be viewed as canaries in the mine – signals of necessary academic re-engineering, however traumatic that may be to the career plans of department administrators, entrenched faculty, and tenure-aspirant PhDs.

Sadly, the Brydon proposals were met with indifference by the professional societies, lingering behind the curve of evolution, blinkered at the opportunity to broaden their scope and influence, fixated with the idea that the market should come to them, rather than the other way around.

As one head-scratching alternative instead, the Center for Audit Quality on behalf of the auditors of US public companies announced on October 10 a perhaps unique collaboration – a multi-year partnership with the Pittsburgh Steelers of the National Football League, to foster support of student interest in the field of accounting. 

Imagination stirs. The financial statements of a football club could include topics of real-world relevance and also pedagogically engaging: estimating a contingency provision for the impact of unpredictable career-ending injuries, or the amortization period for the cost of player contracts, or the timing of revenue recognition for advance payments to secure season tickets and VIP boxes.

Or, because such arcana might not suit student appetites and attention spans, if given game-day tickets they might apply in the stadium the skills needed as staff auditors - tracking between plays the net effect of in-and-out substitutions to assure that each team had precisely eleven players on the field - reinforcing the core proposition that debits always equal credits.

Student-worthy prizes and inducements might include the opportunity to audition for a Heisman House commercial, or the ultimate, to bring Mean Joe Greene back to Pittsburgh to re-enact his iconic jersey toss to the kid in the Coca-Cola commercial.

As for entry-level and early career compensation, the market would appear to be capable of adjusting. At the top of the curve, Deloitte as the largest of the Big Four announced on September 7 its global 2023 revenue of $ 64.9 billon - under-writing an increase in the percentage of US revenue going to staff compensation to 55.4%, up over four years from less than 50% (Financial Times, October 10, 2023), while at the same time sustaining handsome individual average partner pay, as reported, e.g. in the UK to be £ 1.06 million (about $ 1.3 million). 

The agility enabled by Deloitte’s robust results will not translate universally down the size curve. Instead, business models evolve. The structure of the modern profession was developed in the generation after Mr. Deloitte’s pioneering of the now-standard auditor’s opinion in 1850. Public company audits in the post-war decades were provided in the US by the then-Big Eight and Little Eight, now reduced to the surviving Big Four and a smaller handful.

With every other part of the world’s economies fundamentally altered beyond recognition over that period, it would be unthinkable that the long-established assurance delivery model should be expected or entitled to immunity from equally disruptive change.

Professional recognition, respect and legitimacy are not bestowed as of right or entitlement. Instead, the creaking survival of a model fundamentally unchanged for 175 years, when no other sector is recognizable over the same period, suggests that tectonic forces are at work, grinding slowly but building to an inflection point. 

That is especially the case because, sitting beside any supply-side concerns for the availability of new CPA feedstock is the symmetrical likelihood that developments in technology and artificial intelligence will influence the demand side. Impacts are coming, from re-definition of the functions and qualifications of the coming generations of accountancy professionals to the elimination of many of their current activities altogether.

The status quo will change. Opportunities will continue to be rich and varied. If there is a clear road to the future, however, it is tracked today on nobody’s map.      

 

Thanks for joining this dialog. Please share with friends and colleagues. Comments and feedback are invited and encouraged, and subscription sign-up is easy and free - both on the Main page.

UK Audit Reform: Seeing Past The Government’s Blinkers

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.

 

Thanks for joining this dialog. Please share with friends and colleagues. Comments are invited and welcome, and subscription sign-up is easy and free, both at the Main page.    

UK Audit Reform: Carson Block Comes Up Short

Since the collapse of Carillion in January 2108, there is no remaining dispute on the desirability of extensive re-engineering of Big Audit –- the model by which assurance is provided on the financial information issued by the world’s large public companies.

That said, the discussion was not advanced by short seller Carson Block, who in the Financial Times for May 20 re-played the too-familiar proposition that “the audit industry is failing to protect investors and employees from malfeasance.”

Right message. As for the messenger … not so. The reasoning is deficient, to be explained shortly, but first recognize the anomaly of criticism from someone with deep self-interest in preserving the current model.

Leave for others the impassioned views on the legitimacy –- indeed, the morality –- of short selling. Rather, Block’s arguing for accounting and audit reform is like a whisky salesman arguing for prohibition. The success and very business model of his hedge fund Muddy Waters Capital depend on the ability to dig out and exploit the undiscovered misbehaviours that lurk in the dark niches of corporate reporting.

From his reputation-building attack on Sino-Forest in 2011, down through NMC in 2019 and GSX and Luckin Coffee in 2020 –- all could have been non-events, in the capital markets and for Block himself, if only detected and mitigated on a timely basis, under a model not beset with systemic dysfunctionality.

Nor is there anything new here. Short sellers and their brethren have long been active in the gaps and inadequacies in Big Audit. My own first experience with the world of white-collar financial criminality goes back to 1973, and the Ponzi scheme at Los Angeles-based Equity Funding, exposed by renegade analyst Raymond Dirks rather than by dual auditors Haskins & Sells and Seidman & Seidman.

Beneficial for investors and the entire market structure as would be timely prevention of the malfeasance that inheres in a system populated by those ready to exploit its weaknesses, achievement of real improvement would come at the cost to Block of the very feedstock for his success –- even as that virtuous environment is nearly impossible to imagine in a world where public expectations are of “zero defects” in the operation of a complex system designed and run by fallible human beings. 

Passing the question of Block’s credibility as a critic, his views have these flaws:

First, it is incorrect that “material accountability” for lapses in audit quality is enabled by the “ringfencing of liability.” The market facts are to the contrary.

True, a “worst case” civil or regulatory outcome in, for example, Wirecard in Germany, or NMC, Carillion or Patisserie Valerie in the UK, would be fatal to the financial viability of the local firm of a global network. From there, however, cross-border or global network-level liability becomes irrelevant. The fragility of the global networks was demonstrated in 2002, with the unwillingness of the ex-US firms of Arthur Andersen to support its US firm under the liability of Enron –- thus not a consequence but a major contributing cause of its disintegration.  

Second, Block rings again the long-heard theme that consulting services are “the most insidious way that the audit firms abuse public trust,” advancing the notion that auditors are exploited to “whitewash” business problems.

Which is simply not so -- recent examples to the contrary being the revelations at Wirecard and Adler in Germany, where auditor activity beyond their statutory remits figured prominently. Moreover, the case for broadened rather than narrowed auditor competencies and services, laid out in Sir Donald Brydon’s comprehensive if regrettably side-lined report of December 2019, is now at the forefront of the energized public calls for expanded reporting and assurance in the Environmental, Social and Governance space. 

Least appealing in his whinging is Block’s failure to offer constructive suggestions. The evolution to an achievable and sustainable Big Audit model, assuming resolution of all the necessary challenges, will not sprout and blossom if watered by the crocodile tears of those whose interests are served by the preservation of the status quo.   

Nor, it must be said in conclusion and agreement with Block’s opening shot at the official “failure actually to do anything” on audit reform, is there any credible explanation for the Boris Johnson government’s silence, now running from the March 2021 launch of its fully-informed consultation, other than the bare state of its empty tool kit.   

For that, it is well past time to acknowledge that “operational separation” of the Big Four audit practices is no more than an exercise in optics and appearances, while the forced reduction of their dominant market share of FTSE 350 audits is a “solution” thoroughly discredited as unrealistic and unachievable.

Instead, necessary fundamental changes will require re-visiting of basic principles so long embedded in the model that practitioners and participants can scarcely imagine alternatives –- regarding scope and permissible range of audit practice, extension and diversity of auditor competencies, evolved financial and governance structures for assurance providers, and re-casting of the regimes of regulatory oversight and legal liability.   

 

Thanks for joining this dialog. Please share with friends and colleagues. Comments are invited and welcome, and subscription sign-up is easy and free – both at the Main page.

Audit Reform in the UK? The Queen’s Silence Says It All

As reported in London, there were two notable absences when the Queen’s Speech was delivered on May 10, in the effulgent pomp and circumstance of the State Opening of Parliament.

Missing was the Queen herself, claiming “episodic mobility problems” –- a prudent choice, for a monarch of 96 years and in official harness since her coronation back in 1953.

Second was any mention of legislation on the parlous state of Big Audit –- the model by which assurance is provided on the financial information of large public companies –- a franchise dominated by the tetrapoly of Deloitte, EY, KPMG and PwC.  

The Queen’s substitute was Prince Charles, the longest-serving heir apparent in British history – for which, no criticism. A legislative body with 800 years of history can survive being read to by the senior member of the House of Windsor’s second team.

Less credible is that the energy for audit reform in the UK has run steadily downhill since the January 2018 collapse of the massive contracting and project supervising enterprise Carillion. The immobility of the Boris Johnson government is faced by Kwasi Kwarteng, secretary of the Business, Energy and Industrial Strategy department –- himself frozen in silence on Big Audit since his public mention in January 2021, the first month of his tenure.

The absentee BEIS secretary’s disinterest would be consistent with years of official attitude, in the face of a roster of reports and criticisms: Sir John Kingman’s final report of December 18, 2018, which characterized the UK’s audit regulator --  the Financial Reporting Council -- as ramshackle and shambolic; the Competition & Markets Authority’s Update Paper, finalized on April 28, 2019; the Parliamentary BEIS committee’s report, “The Future of Audit,” of April 2, 2019; and Sir Donald Brydon’s December 2019 report, on his “Independent Review Into the Quality and Effectiveness of Audit.”

With that fulsome body of material in full view, the BEIS department launched its consultation, “Restoring Trust in Audit and Corporate Governance,” in March 2021; with its prompt closure that July, there has been dead silence since.

Political concerns are said to dominate, as the government’s concerns and priorities lie elsewhere. Audit reform is characterized as “boring” by contrast to “wedge issues” designed to “go down well with voters.”

That’s as may be, although it is no less plausible that reality has intruded and that Whitehall may actually realize that its kit is empty of tools.

That is, in the entirety of the proposals floated by the various critics, there are only two with possible direct effect on the business model and performance of the handful of firms that dominate Big Audit.

The first is “operational separation,” by which the Big Four firms have agreed with the FRC to identify distinct leadership, governance, and performance metrics for their audit practices. That insubstantial undertaking was from the start never more than an exercise in optics, as the firms were already running their businesses that way, indeed with considerable public disclosure.

The second was the critics’ notion that both audit quality and large-company auditor selection would somehow benefit if the Big Four were forced to yield up a material portion of their dominant share of the FTSE 350 audit market. The barriers to such a fancied “solution” have been comprehensively laid out, centering on the lack of both appetite and resources on the part of the unfortunately-labelled mid-tier “challenger firms.”

Laid beside the official paralysis, it matters that while evolution in Big Audit is not possible without the participation of all the players -- issuers, auditors, providers of capital, standard setters, regulators and the legal systems and agencies of law enforcement -- each of those has its own vested interest in resisting change, preserving and maintaining a status quo that is viewed as working tolerably well. 

In that context, an observer would be justifiably anxious that any official policy action could deliver unintended consequences all too familiar from earlier efforts –- the hasty passage of the Sarbanes/Oxley law in the US in 2002, the UK’s mandating of auditor re-tender in 2012, and the EU’s parallel imposition of mandatory rotation in 2014.

Not only should the interested parties look to limit official action to the “do no harm” variety, they would well recognize that while the official policy of inaction is in effect, no affirmative harm is being inflicted.

In other words, for those judging the government’s passivity to be fraught, it would be wise to consider the approach of Napoleon Bonaparte in his Austerlitz campaign: “Never interfere with an enemy when he is making a mistake.”

 

Thanks for joining this dialog. Please share with friends and colleagues. Comments are invited and welcome, and subscription sign-up is easy and free – both on the Main page.

 

Cap the Big Four’s UK Audit Market Share? A Message From the Facts

It’s nearly four years since Carillion's collapse in the United Kingdom triggered the latest wave -– “Where were the auditors?” While that question is pursued in the Official Receiver's £ 1 billion lawsuit launched against KPMG on November 19, what passes for broader discussion on the Big Audit model has come down to this:

Proposals for “managed shared audits” -- by which the smaller audit firms would perform a material portion of the audits of the FTSE 350 public companies –- have failed to achieve any traction. Is there an alternative?

Still floated with varying degrees of enthusiasm is the idea of a “market cap” –- enforced reduction of the Big Four’s currently dominant share of the large audits -– cited by, among others, the financial press (here and here), the ICAEW, and the chief executive of the UK’s audit regulator, the Financial Reporting Council.

To be taken seriously?

Nope. A rude reality check would await an FRC ukase to forcibly reduce Big Four market share. However wishful or earnest the attempt, there is no other source.

For the multiple reasons why managed shared audits so lack favor, the same limitations exist no less for the unfortunately-described “challengers” –- BDO, Grant Thornton, Mazars, and the other smaller firms in rapidly-descending size –- and the even greater complexities of their taking on full audit performance and responsibility.

My practice in confronting such a conundrum is to consult my academic colleague, Professor A Fortiori.

He begins with the context: Under the indifference of the Boris Johnson government, and the functional absence of the secretary for business, energy and industrial strategy, Kwasi Kwarteng, the prospects for substantial change of any kind are minimal. Not least, the likelihood of Parliamentary attention, much less actual legislation, necessary to replace the shambolic history of the FRC with the mooted new ARGA, ranks somewhere below the chances that the British will return to Greece the Parthenon marbles looted by Lord Elgin two centuries ago.

Nor is there any real wrangling over changes in the audit model, attention having long dissipated to the post-Carillion trio of official reports and the admirable work of Sir Donald Brydon.[1] Rather than active engagement among the parties, the faint glow of the public discourse has not generated heat enough to brew a tempest in a teapot.

The estimable A Fortiori commends these points:

“Audit quality” being ostensibly the ultimate goal, commentators (as referenced above) point to the spate of recent company failures and regulatory investigations and sanctions against the auditors both small and large, needless to repeat here. With that list, the position of the head of audit at one of the “challengers” -– that “audit firm size isn’t necessarily correlated to quality” –- should bear the qualifier, “one way or the other.”  

The same holds for FRC audit inspections -– summarized by the Financial Times to “not help the challengers’ case” –- although caution in extracting conclusions from the numbers is always appropriate, when a compliance-enforcement agency can design and apply its own procedures and then grades the results of its own work.

More importantly, the inhibitions on the “challengers” actually to assume the up-scaled responsibilities of managed shared audits have not been answered. As sketched out here last April 21, those include: the difficulty for a reporting company to identify operations or subsidiaries to be audited within the capabilities of the smaller firm; the burden on a lead auditor of full responsibility for the work of a “challenger,” with the prospect of expensive duplication or re-performance of work; the geographic constraints on the smaller firms of the globalized operations of the large UK-based companies; and the auditors’ cross-border litigation exposure for companies whose securities trade in multiple jurisdictions, notably the lawsuit-friendly United States.

The glancing mention of market share caps has yet to address the yawning resources gaps of the “challengers” -- industry and technical expertise, geographic presence, experienced partners and managers at the line level, investment funding, financial and risk-oriented resources, that such explosive growth would require.

Further, those invoking the possibility of steps to cap the market share of the Big Four have yet to grasp the enormity of the numbers -– not to say, the practical impossibility of the task.

As outlined here on August 23, audit clients of the “challengers” presently comprise a mere 1.6% of the FTSE 350's total market capitalization of £ 2.219 trillion –- a figure undisturbed by the rapid rise of Grant Thornton client Darktrace from its April IPO through its prompt entry to the FTSE 250 and further October index bump-up. The available numbers indicate that the capacity building obligation of the smaller firms to take on a mooted 20% of  FTSE 350 audit work, over ten years, would require them to add clients with capitalization of £ 41 billion, each year if evenly spread, or if done gradually, at an unrealistic annual growth rate of some 29%.

With all that, a Big Four market share reduction is even less practical or achievable than managed shared audits –- so says the wry A Fortiori.

Although he also notes that continued inattention to the compelling facts on the market structure of Big Audit is likely, as the observably dreary environment in the UK makes it predictable that the entire topic will continue to be kicked even further into the tall grass.

Where it will lie, ignored and unattended, until the inevitable “next time.”

                

[1] Sir John Kingman’s Independent Review of the Financial Reporting Council (December 18, 2018).

The BEIS select committee report, ”The Future of Audit” (April 2, 2019).

The Final Report of the Competition & Markets Authority on its Statutory Audit Market Study (April 18, 2019).

Sir Donald Brydon’s Independent Review into the Quality and Effectiveness of Audit (December 2019).

 

Thanks for joining this dialog. Please share with friends and colleagues. Feedback and reactions are solicited and welcome, and subscription sign-up is easy and free – both at the Main page.  

 

“Managed Shared Audits” in the UK – The Largest “Challengers” Think Not

What – they expected gratitude?

“Managed shared audits” were at the center of the UK government’s March 18 Consultation paper on audit reform. The proposal, aimed to loosen the Big Four’s dominant hold on the audits of the FTSE 350, would specifically benefit the smaller, wretchedly-designated “challenger” firms, by mandatory carve-out of ten to thirty percent of each newly-tendered audit to be gifted to the latter.

For reasons outlined here on April 21, and detailed in my short book on the post-Carillion environment in the UK,[1] the imposition of shared audits across the FTSE 350, never realistic, was fatally flawed and doomed to rejection. Quickly summarized: for the companies themselves, the process would be unmanageable, while the Big Four would gain nothing but valueless inflation of their costs, effort and liability exposure, and the smaller firms could never provide the necessary skills, personnel and capability.

One deservedly skeptical response to this offer –- another version of “We’re from the government, and here to help you” -- is now essentially confirmed. Instead of thankful appreciation, the UK firms of BDO and Grant Thornton – ranked fifth and sixth in the league tables – have recognized and spurned the government’s poisoned chalice. Their “no thanks” -- reported in the Financial Times of May 25 –- was spun diplomatically, as their “considering not pitching for work on shared audits of FTSE 100 companies….”

Their demurrer echoes the mordant humor of Abraham Lincoln, who captured the pain and frustration of the American presidency by likening his position to the man tarred and feathered and carried out of town on a rail – who, asked how he liked it, replied that “if it were not for the honor of the thing, he would much rather walk.”

As put to the FT by Grant Thornton’s head of audit, “If the challenger firm is just going to get what’s left at the bottom of the barrel, that’s not interesting and doesn’t help….”

Although the FT coyly suggests that the two firms “are considering focusing on increasing the number of FTSE 250 companies they audit,” Grant Thornton’s shared audit stand-down aligns with the reasons that underlay its 2018 decision “to stop bidding for audit contracts from Britain’s largest companies after concluding it is too difficult to compete with the Big Four firms that dominate the market.”

Clear perspective on the scale necessary to perform large complex audits reveals these implications, too important to ignore:

• First are the size comparisons illustrated by the 2020 revenues of BDO and Grant Thornton (globally $ 10.3 billion and $ 5.76 billion) –- fractions of the Big Four which range from KPMG at $ 29 billion to Deloitte’s table-topping $ 47.6 billion. The inhibitions on the “challengers” are not (necessarily) those of performance quality. Rather, as one FT reader incisively commented, a house carpenter may be perfectly competent to build a single-family home, but could not possibly qualify to build a high-rise tower.

• Second, in the other direction, BDO and Grant Thornton –- as the largest among the smaller -- were noted by the FT to “earn more UK audit fees in aggregate than the next 14 challengers combined.” Not only should their strategically rational risk and capacity assessments compel a reality check for their brethren down the size chart. In addition, their opting out of a shared audit regime emphatically rebuts the possibility that the remaining firms, however willing, could make up a critical mass of delivery capacity.  

The Consultation’s move for “managed shared audit” took a deliberate pass on even less achievable proposals, to enforce Big Four caps or market share re-distribution of the FTSE 350 audit sector. Its single idea so discredited, whither now?[2]

Fundamental re-engineering of large-company information assurance, guided by the insights of Sir Donald Brydon in his December 2019 “Independent Review Into the Quality and Effectiveness of Audit,” requires attention to the dysfunctionalities embedded in the current model. Those include the archaic and outmoded constraints on the scope of permissible auditor services, and the potentially fatal litigation impact on the firms’ financial and business structures, awaiting with the inevitable financial failures on the magnitude of Enron that disintegrated Arthur Andersen in 2002.

Assurance sufficiently extensive and flexible to be fit for today’s demands will remain beyond reach, until and unless the public dialog embraces discussion of these issues. Otherwise, as BDO and Grant Thornton have now confirmed, the dominance of the Big Four as presently configured –- even inhibited as they are by the golden handcuffs of their franchise -- is the only game in town.    

 

[1] “DOA: Can Big Audit Survive the UK Regulators” (Amazon 2019)

[2] One of the aggressive voices for mandated sector re-structuring was that of the Competition & Markets Authority, then led by since-departed Sir Andrew Tyrie. Even with its bust-up advocacy, the CMA’s April 2019 “Statutory Audit Services Market Study” gave legitimacy to the strategic reluctance of Grant Thornton to pursue FTSE 350 audits, conceding (¶ 3.135) that it “may be a rational reaction….”  

 

Thanks for joining this dialog. Please share with friends and colleagues. Comments are invited and welcome, and subscription sign-up is easy and free – both at the Main page.