[A-List] UK: financial regulatory crisis
Michael.Keaney at mbs.fi
Thu Jul 11 02:13:21 MDT 2002
Now would seem to be a good time for the government to pick a fight with organised labour...
Big Four come out fighting as audit changes loom after Andersen scandal
Accountancy's top guns open fire on forced rotation of audits and hiving off consultancy
By Katherine Griffiths
The Independent, 09 July 2002
They are under attack from every corner, but the Big Four accountancy firms have come out fighting for why their profession in the UK should not be pulled apart and remade by politicians keen to avoid a repeat of the Enron and WorldCom scandals on this side of the Atlantic.
The Big Four, who were the Big Five until Andersen was dragged down by its role in the Enron affair, are lobbying against the central ideas for reform being mooted by the Government. Instead they favour far more specific changes which they say will go to the heart of what needs to be changed.
Patricia Hewitt, the Secretary of State for Trade and Industry, and Melanie Johnson, the minister for Competition, Consumers and Markets, echoed suggestions first raised by Sir Howard Davies, the chairman of the Financial Services Authority, when they indicated last week that the Government is thinking seriously about forcing accountancy firms to rotate their audit divisions between clients every seven years or so.
They also indicated that the Government might stop firms from selling lucrative consultancy services to companies whose finances they are meant to be subjecting to an independent investigation.
PricewaterhouseCoopers, KPMG, Deloitte & Touche and Ernst & Young have challenged both ideas on the basis that they would not guarantee more independence and, in the case of mandatory rotation, could double the cost of audits while cutting the quality of the work.
Nick Land, the chairman of Ernst & Young, spoke for most senior figures in the field when he pointed out that countries that have tried compulsory rotation, such as Italy and Spain, have not seen positive results.
"All the evidence suggests that it is not satisfactory. This is because if all you do is audit, over a period of time you can expect a significant reduction in the quality of people who want to join. There is also a risk that the audit will not be satisfactory in the first two years when auditors are still trying to get up to speed with a big company and, if they only have a couple of years to go, the danger is they might take their eye off the ball," Mr Land said.
A senior partner at another Big Four firm pointed out that in terms of narrow self interest, rotation of firms would benefit some of the big players. "In many ways it is in the interest of three of the Big Four to back rotation because PwC is so dominant in the market that over time rotation could make it even out."
The Big Four have shown more enthusiasm for the rotation of audit partners. The main partner on a company's audit does already have to move on after seven years to stop him or her, in accountancy parlance, "going native". This could be extended to all senior partners on a particular job, who could be switched over in phases.
The Big Four have not made a secret of their opposition to a possible across-the-board ban on audit firms offering other services. Mr Land pointed out that the move does not take into account the variety of lines of business included in the "non-audit" category. "In terms of speed and efficiency, it makes good sense for auditors to do due diligence at the time of an acquisition," Mr Land said. The same, he said, goes for tax advice.
Where firms welcome a crack down is over business development or IT consultancy. "Can an audit system, while also putting in an entire IT system, be seen to be independent and objective? I don't think so and I think this should be prohibited," Mr Land said.
That view is at the more radical end of the spectrum of thought and reflects the fact that Ernst & Young was the first of the major firms to hive off its consultancy arm - a move followed by KPMG. But now all the large firms realise there is demand for independence and PwC and Deloitte will also split off their consultancy businesses through IPOs.
The Big Four bristle at the idea that they have benefited from the fallout from Enron because it knocked one of their number out of the market - a scenario which prompted Treasury officials last week to raise the possibility of a referral to the Competition Commission.
Kieran Poynter, the chairman of PwC, Britain's largest accountancy firm, said of the demise of Andersen: "In reality this has not reduced the choice of audit appointments, especially in the UK, because it was not a significant player. And, as most of its audit work will go to Deloitte, it has strengthened competition because it will make one of the other competitors more powerful than before."
The firms are particularly cynical about the Competition Commission being dragged into the debate now, as the authorities waved through the largest merger in the sector, between Price Waterhouse and Coopers & Lybrand, in 1997 and only two years ago took another look at the profession and did not find any cause for concern.
Many senior partners feel that far more pressing than them putting their own firms in order, is the need for companies to clean up their corporate governance.
Neil Lerner, the head of risk management at KPMG, said: "The issue in UK accounting has to be driven by having better financial reporting, improving corporate governance, looking at executive incentives, share options and aggressive earnings management. Once we have got these right we can look at auditing to make sure the highest quality is guaranteed."
The Big Four hope some radical suggestions to beef up the role of non-executives will come out of Derek Higgs' review, which was commissioned by the Government. The Association of Chartered Certified Accountants yesterday added its own voice, calling for proper funding for audit committees and branding share options being paid to non-executives as "wholly unacceptable".
Despite defending themselves under the heavy fire of recent weeks, the accountancy firms know they cannot just point out the serious short-comings to be found in other parts of the corporate world. Mr Land observed: "Everyone will tell you that the UK system is better than the US one, but perceptions of a crisis of confidence are running high. We have got to deal with that and accept that one does need to make changes and reforms."
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