t was supposed to be a tight race, fiercely fought. Three years ago, after remaining persistently with PwC (PricewaterhouseCoopers) for the first 119 years of its existence as a publicly traded company, Barclays decided to launch a tender and choose a new auditing company. The contract in question was not only prestigious: it was also very profitable. In fact, the year before, the bank had paid PwC an astronomical £ 44 million to check its books, one of the highest rates ever paid on the UK market.
Yet despite all those incentives, Barclays has struggled to organize and manage the race. In the end, the bank chose Kpmg, both for the lack of alternatives and for other reasons. The other two auditing firms belonging to the "Big Four" group, the most important auditing firms considered large enough to carry out this task, were both undecided. Deloitte was hindered by a consultancy contract with that same bank, and observers noted that his offer was in any case lukewarm. EY (Ernst & Young) did not even take part in the race, having been chosen shortly before for the audit of Rbs, one of Barclays' most important British competitors.
Competing companies have questioned whether EY at the time had the necessary resources to handle the audit of another major bank. And they expressed concerns that the Bank of England could approve that EY dealt with both simultaneously. The only alternative left, therefore, according to two partners of a large British auditing company, was Kpmg.
"It was absolute idiocy," said one of them. "How could it have been a painstaking race if Kpmg was the only possible candidate?" Barclays declined to comment on this article. The race was compounded even more by the fact that Barclays' hearing committee chairman Mike Ashley was the former head of quality at Kpmg Europe. In the present case, Barclays chose Kpmg after both members of the committee abstained from their assignment to choose the new auditing firm. “A British public limited company is not expected to work like this. The choice was too narrow, "said the other partner.
Conflicts hidden with great discretion
Most of the companies listed on the stock exchange in Great Britain and the United States use one of the Big Four, the four big auditing companies. Kpmg, EY, Deloitte or PwC control the books of no less than 98 percent of the companies that make up the Ftse 350 index (the most important in the UK market). In the United States, they account for no less than 99 percent of those in the S&P 500 index. The existence of four huge auditing firms such as these could lead to the idea that the choice is there, although not very wide. In practice, however, observers say, this too is pure illusion.
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Below the surface, often considerable conflicts are hidden with great discretion. Accounting companies are not required to provide transparency regarding the assistance they provide to companies, from pensions to tax advice, from advice on payment policies to suggestions for any restructuring. In many cases, these collateral activities can be far more profitable than a simple audit contract (which, in addition to implying a legal risk, also limits the possibilities for the company in question to compete with an offer to win non-performing activities. revision).
This year, for example, when the giant Carillion collapsed, it turned out that over the course of ten years, Kpmg had gained around £ 15 million to audit the accounts of that group, a task that could be turned against in the future. Meanwhile, in the same decade, Deloitte had earned £ 51 million to provide a range of services which included internal audits, auditing of balance sheet and contract data and restructuring consultancy. While it is rare for public opinion to become aware of conflict situations that preclude large companies from considering two, at best, or in some cases only one of the Big Four for their auditing needs, it is good to know that these practices are almost routine
In truth, EY was the only one of the Big Four to compete for the assignment.
The history of the Rio Tinto mining group is similar: according to the rules of alternation envisaged by the EU, PwC had to be discharged. As EY reviews the accounts of its main competitor, Bhp Billiton, this situation meant that the only two options left were Deloitte and Kpmg. In June the latter was chosen in the prescribed manner. "Choosing between three audit firms is fine, as long as they are all capable of providing excellent auditing services," says Laura Empson, a professor at London's Cass Business School. "Choosing between two is already more worrying." He added: "If one of the two remaining companies is not particularly inclined to devote adequate time and resources to win the
There is no competition
The increasing concentration of auditing firms worries shareholders, academics and accountants who fear that this may compromise their quality. Kpmg, for example, has been at the center of a series of accounting disputes over the past twelve months and in June has been severely reprimanded by the UK surveillance agency which criticized the "unacceptable deterioration" in the quality of its auditing work. Despite these alarming facts, Kpmg has continued to win prestigious clients for the audit, including the private equity group 3i. On the other hand, it does not seem to see signs from which to deduce that new competition is emerging from companies that do not belong to the Big Four group.
Indeed, everything seems to go in the opposite direction. Earlier this year, the UK's fifth largest audit team, Grant Thornton, said it would stop participating in tenders to audit companies in the Ftse 350 index. The company said it was tired of having to incur expenses to win an assignment and specified that she suspected that she was invited to take part only in order to reach an adequate number of candidates. Grant Thornton's managing director, Sacha Romanovitch, said she was annoyed at always getting to an "honorable second place."
The network of old auditing firms
Companies could increase competition quite easily if they viewed second-tier auditing companies more seriously, rather than just using them to make numbers. In any case, this system encounters some resistance, for reasons that are both cultural and practical. Let us first understand those of a practical nature: globalization has led to the creation of large and complex multinationals, which require auditors who have global experience in almost every field, from the valuations of bonds to cryptocurrencies and cyber-analysis, we go repeating from many sides. Only the Big Four have such dimensions and organizations that they can deploy this type of expertise and services in adequate quantities. Last year, when Standard Chartered launched a tender for a new assignment of auditing operations, it openly excluded the Big Four, stating that "they would not have had the necessary resources to provide an efficient service". Behind this practical defense, however, there is a deeper cultural prejudice.
Among the largest British companies listed on the stock exchange, 61 of the 100 positions of chairman of the audit committees at the end of last year were occupied by alumni of the Big Four, according to Accountancy Daily. The relationship between the Big Four and large corporations extends far beyond the boards of directors, the world of politics and that of regulatory bodies. This factual situation creates a feedback loop that reinforces the dominance of the four giants, given that their connections are a huge advantage when it comes to making offers for public or private works. Consider, for example, the water services sector: in Great Britain this sector is private and strictly regulated. Recently, PwC was confirmed as the delivery partner of the Ofwat regulatory body,
This involves carrying out an accurate check of the business plans in the sector to determine the appropriate prices. PwC had undertaken the previous price revision in 2014, during the period when it carried out revisions or consultations to no less than nine of the nineteen water companies in the United Kingdom. This time, his job is more modest, but he remains statutory auditor for three companies in the water sector, including the UK's largest, Thames Water, and provides services to many others. Concerning this circumstance, Prem Sikka, professor of accounting at the University of Essex, says: «Without a doubt, these connections will be exploited to attract customers and make the company show you how to manage the situation to get along very well in the scope of regulations.
Options for ending the oligopoly
Auditing is a somewhat unusual oligopoly. In 2014, the last time it checked the Big Four, the UK's competition regulator found little evidence of sharp price increases. The main concern is that their dominance leads to botched reviews, conducted with minimal expenses and by staff lacking the necessary experience. Despite official attempts to loosen the Big Four's grip - mostly through the introduction of mandatory alternation - their grip seems to be stronger and more resilient than ever. In 2015, the Big Four had audited 95 percent of the UK's largest listed companies. Their numbers have now jumped to 98 percent.
Industry observers believe that something much more drastic is needed. The most radical idea - a large-scale spin-off - is gaining more ground and supporters, including Liberal Democrat leader Vince Cable and Sharon Bowles, former president of the European Parliament's Economic and Monetary Affairs Committee. "A large-scale spin-off is the only way that allows the distribution of expert personnel throughout the system, so that real competitors and a critical mass outside the Big Four can be created," Baroness Sharon said. "This is the only solution that will not bring costs back to others."
There are also those who believe that it is possible to intervene with the scalpel in a different way. Professor Laura Empson, for example, argues that creating companies that deal "exclusively with audits" is the only viable solution. "It's not so much the oligopoly that worries me, but the conflicts of interest between the parties involved in auditing and those who consult a company," he said. As was conceivable, both proposals terrify the Big Four.
They argue that each of the proposed solutions would risk weakening the sector and leading to poor auditing operations. "It's a weak idea," said one president. But there is no shortage of speculations that pressure on the Big Four could eventually encourage one of their rapidly growing advisory branches to break away, as happened in 1998 with the divorce of Andersen Consulting. A tax professional who works for one of the companies in question said: "I can't wait for the day when the Big Four auditing job will be forced to distance itself forever from other operations. My career and aspirations have been hampered by this.
Indecision? It might help
There are legitimate concerns about how large-scale spin-off could occur in the industry. And it is not yet clear how forcing the Big Four to split into eight medium-sized companies can improve the quality of the reviews themselves, for example. Both the industry giants and their smaller competitors are opposed to the solution that only involves auditing, saying that companies of this type could not live well and would not have the means to attract the workforce that the sector requires. While second-tier companies are inclined to reform to weaken their larger competitors, they are cautious about what might affect them too. BDO wants auditing firms not to be allowed to offer advice to clients for whom they carry out audits, because they believe this would reduce the chances of conflicts and help smaller companies grow. The French company Mazars wants a market share threshold to be set, and urged the British authorities to take into consideration the French requirements for listed companies, which plan to have two different auditors.
There is a possibility that the inability to converge around a single solution could get the Big Four out of trouble. Among the other ideas disclosed are that of outsourcing the selection of auditing firms to an independent body, for example a regulatory body, the stock exchange or the government, to overcome cultural prejudices about the Big Four.
This would also make it possible to remove the responsibility for approving appointments for shareholder audits which, as is well known, remain passive when it comes to voting for decisions of this type. A further obstacle to the reform could be the difficulty in reaching a consensus between the regulatory bodies of the United States, Asia and Europe. Nonetheless, the pressures are increasing. Ever since parliamentarians began investigating the collapse of Carillion, he said: «I have a clear feeling that the idea of breaking them up and breaking up once and for all the auditing activity from the rest should be carefully investigated. What we have now is not a market that works properly. "
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