Carillion proves how broken our audit market has become
The collapse of the construction firm Carillion has put the so-called “Big Four” accountants back in the spotlight.
KPMG, PwC, EY and Deloitte were all accused by a parliamentary select committee of “feasting on the carcass” of Carillion, earning more than £70m in fees between them over the past decade.
PwC in particular was criticised for working for all three parties – the company, the government, and the pension scheme – involved in the liquidation.
The Financial Reporting Council is looking into KPMG’s audit work at Carillion over concerns that it failed to spot the company’s many troubles in the months before it collapsed. Two of Carillion’s last three finance directors came from KPMG, which had signed off the group’s accounts since 1999.
At the weekend, it also emerged that PwC and EY were two of three consultants paid £3.1m on the very same day Carillion was attempting to secure a £10m emergency loan from the state.
Just four years after regulators looked to end the dominance of this quartet of accountancy giants, we are left to conclude that this remains a cosy club that, at the very least, gives the perception of numerous conflicts of interests.
The Competition Commission and its successor body, the Competition and Markets Authority (CMA) were soft on the Big Four when they investigated the audit market. I encouraged the investigation. It was one of the disappointments of my tenure as business secretary that this probe dismissed breaking up the Big Four and instead decided only to enforce the light-touch measure of regular retendering.
This meant that FTSE 350 companies had to put their statutory audit engagement out to tender at least once a decade in an effort to make sure Big Four firms did not, as had been common, end up automatically running the rule over a listed client’s accounts for many years. A third of the FTSE 100 had used the same accountant for 20 or more years.
The chair of the investigation, Laura Carstensen, said regular retendering would give shareholders a greater opportunity to hold auditors to account and “deliver lasting change in a market where currently a major company putting its audit out to tender remains unusual enough to be a news story”. Similar changes to the market were demanded by the EU.
The impact, though, has not been significant. According to the FTSE 100 Auditors Survey of 2017, there was only one firm in the biggest 100 listed blue chips whose figures were examined by a non Big Four firm: South African miner Randgold Resources, which used BDO.
Instead, there has been something of a merry-go-round among the Big Four in the previous 12 months, with EY increasing its market share of the FTSE 100 by winning six additional clients that secured it a 115 per cent rise in revenue to £136m. PwC still had the most FTSE 100 clients, with 37 against 38 the year before.
When the Office of Fair Trading referred the audit market to the Competition Commission in 2011, it did so over concerns that the work was concentrated in too few hands with prohibitive barriers to entry for mid-tier accountancy groups like BDO, Grant Thornton, and Mazars. But the subsequent remedies have clearly done little to alleviate those worries.
This is why I have written to CMA chief executive Dr Andrea Coscelli calling for a fresh investigation. This might well result in the Big Four being forced to spin-off their lucrative consulting arms.
This structure is where of the potential conflict of interest concerns are generated, when an accountant might overlook the odd problem so as to not annoy a client that pays them well for other work.
Of course, firms will argue that there are “Chinese walls”, but doubts remain as to their effectiveness.
In my letter to Dr Coscelli, I told him that regulators have “for far too long stood back and allowed the Big Four to dominate”, and that this is “not healthy for the industry itself or their clients”. There needs to be far greater competition.
If the Carillion debacle has one positive consequence, it should be that regulators use it as an opportunity to reform the audit market, increasing competition to drive down fees. It’s high time the audit market was opened up to new players.