The Big Four have grown even more strongly since staving off calls to break themselves up. But given the accounting scandals that have dogged them, what has also grown is unease at the industry’s light policing.
An independent review last year recommended fines of £10 million and more were appropriate punishment for audit failings.
That would be a step up from the present record of £5.1 million. But it still represents chump change when considered in the context of the size of these firms, or compared with the huge conduct costs that banks are bearing — or the sums the Information Commissioner’s Office is talking about for companies which mishandle customer data.
Meanwhile, cases where the auditor’s role is called into question appear to multiply: BHS, Rolls-Royce, and now Carillion. The list goes on. I’m told £25 million is about the size of fine that would focus auditors’ minds.
An alternative solution was employed in India last week. For failing to raise the alarm over a $1.7 billion (£1.2 billion) fraud at IT contractor Satyam Computer Services, PwC has been banned from auditing listed Indian companies for two years. Satyam is a colourful story.
The co-founder, Ramalinga Raju, who overstated revenues at what was labelled “India’s Enron”, wrote in his resignation letter: “It was like riding a tiger, not knowing how to get off without being eaten.” PwC has not been eaten, merely chewed at the edges.
Audit experts say its sin-binning is a massive overreaction. An alternative view is that it got off lightly, given what happened to the auditor of the actual Enron.
Could such market exclusion ever come to the UK? It would be the ultimate firm-wide penalty, instead of laying the responsibility for failure at the door of the individuals concerned.
Given that PwC’s assurance division, which includes audit, contributes a third of its income in the UK, such a sanction would hit all partners where it hurts — in the pocket. But it would also create chaos for all the other clients that would have to scramble to find another auditor.
These days accounting firms are like banks: too big to fail. After the financial crisis, regulators have succeeded in meting out tougher punishment on banks which acts as a powerful deterrent without tipping them over the edge.
They must find a way to make beancounters count more of the cost when things go wrong
