Split decision?

May 2023

Can the Big 4 ever really sort out their ‘conflicts of interest’? Paul Merison asks if break ups are necessary.

In April, EY announced that they had changed their minds and were not going to sell off their audit division after all. KPMG immediately announced that they had never supported this policy, and PwC and Deloitte have also made clear they will not be doing it.

So why was this ever a consideration? And what happens next?

Audit quality – or more pertinently, a lack of audit quality – has been a big concern for many years and only seems to be getting worse. Too many audit reviews are showing up problems across the industry. Add to that the public outcry over the collapse of companies such as BHS and Carillion, plus the repeated fines for audit firms caught doing audits badly (or worse still, lying to investigators during a quality review), and audit is in a really bad place.

The UK government has instructed big audit firms to find a way to operationally separate (whatever that means) their audit divisions from the rest of the business. The logic seems simple enough – if audit partners earn no money other than from audit, then they would not care about selling other services to audit clients and would focus on the audit and nothing else. Ethical threats caused by the desire to earn extra fees, and from growing too close to clients due to the large number of extra services being done, would disappear.

Nobody actually asked the big firms to go as far as splitting up, but EY announced that was their solution. Except now it is not. What the firms will do next is anyone’s guess.

Covid has helped to slow this whole process of improvement down, as we have understandably all been focussed on other things, but something has to be done and fast.

Thing is, there are more pressing issues than the sale of other services to audit clients.

Take Carillion for example, where KPMG sold a relatively low amount of other services in the final years – other services were not, it seems, the problem.

The primary issue is the ‘client’ relationship between auditor and company being audited.
We have had this issue for many years now, and it seems to me that there are much more effective changes that could be made:

  1. Stop companies choosing their audit firms, and audit firms therefore having to sell themselves to those companies. Do the accused get to select the police officers who investigate them? Do exam students get to choose their marker? Far better for an independent body to allocate audit firms to companies and take almost all the ethical threats away immediately.
  2. Where audit quality is deemed below standard, the independent body should remove that audit firm at once and ban them from taking on any new clients for a minimum of two years (as has happened to EY Germany recently as a result of the Wirecard fraud). That would help to focus minds on audit quality.
  3. Use the National Audit Office (or other government sponsored audit service) to audit those companies that are really high public interest, or those where the auditor has been removed for quality reasons.

Breaking up accountancy firms sounds like a big deal but it is not clear how much, if any, benefit it would provide in terms of solving audit quality issues.

Whether anyone in power has the appetite and bravery to push for any of the above suggestions is, I am afraid to say, doubtful.

  • Paul Merison is LSBF London’s Director of ACCA