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Accountants are making headlines again, as the financial crisis spurs controversies about fair value and marking to market. But another, largely unnoticed recent event may have a more structural impact.
On 21 April, Ernst & Young, one of the ‘Big Four’ global networks which dominate the market for large scale corporate audits, announced the merger of its European operations and the creation of an integrated firm covering the Europe-Middle East-India-Africa region. Another integrated firm will cover
But this façade hides opaqueness and fragmentation. One of them claims loftily that ‘transparency underpins our commitment to quality and integrity’, but as the three others, it only discloses scanty information. Each network is a collection of national firms which cooperate through one or several global entities, respectively incorporated in
Deloitte points out that neither its’ Swiss Verein ‘nor any of its member firms has any liability for each other’s acts or omissions’. By contrast, PwC states that ‘each PwC firm is fully accountable and responsible to the entire PwC network of firms for the quality of its performance’, even though it fails to specify how this accountability is exercised.
In one case, several global entities co-exist, some registered in the
On the financial side, at global level there is no public information whatsoever on anything except revenues. The global profitability of the Big Four, or the shape of their combined balance sheets, are closely guarded secrets.
At national level, in the
Accountants claim that the fragmentation stems from the risk of legal liability for malpractice that the auditors may have overlooked or, worse, knowingly tolerated. The fall of Andersen in 2002, following the Enron scandal, has shattered the profession. An ‘independent’ national firm can be dropped if it blunders, without dragging the rest of the network down.
Exactly that happened last year to PwC’s Japanese arm. But the concern to isolate national damage also implies that the Big Four have serious misgivings about their own ability, past and present, to enforce a high level of audit quality throughout their networks.
The lack of transparency is also unhelpful in key current policy discussions, especially about auditor liability and the concentration of the audit sector among four global players.
These debates are thwarted by the fact that policymakers have no idea of the Big Four’s profitability, liabilities, or insurance costs. The issue of market concentration is a competition problem (a recent
There is no magic bullet to solve this problem, even if one considers radical change, such as the UK Financial Reporting Council’s proposal to deregulate audit firms’ ownership. But better information about global risks and profits would shed much useful light.
Other efforts have been made. PwC has created ‘eurofirms’ which group some functions for continental
But the Ernst & Young initiative is a bigger step. By creating a single firm for the whole of
In contrast to 2002, the current financial crisis has hit the ratings agencies hard but has so far largely spared auditors – perhaps because audit quality has improved since the Enron shock. But it is probably just a lull.
KPMG has come under criticism for the collapse of New Century, a California-based mortgage lender, and investors have sued Deloitte as auditor of Bear Stearns’ infamous hedge funds.
Public authorities may once again have to tighten the screws of regulation. But it would be better if this were only a last resort. Reform will be more effective if it comes from the profession itself.
In this respect, it is to be hoped that Ernst & Young is successful in carrying forward its transformation, but not only that. It should be the prelude to improved financial and organisational transparency on the part of all Big Four audit networks, in
By Nicolas Véron
The article was originally published in French in La Tribune,