18 August 2021

The Guardian: “The financial scandal no one is talking about”

The disappearance of one of the four major firms – for example through the loss of licences following a criminal conviction, as happened to Arthur Andersen & Co in 2002 – presents an unacceptable threat to auditing. So, in what one former big-four partner described to the FT as a “Faustian relationship” between government and the profession, the firms escape official scrutiny even at low points such as the aftermath of the financial crisis. They are too few to fail.

The major accountancy firms also avoid the level of public scrutiny that their importance warrants. Major scandals in which they are implicated invariably come with more colourful villains for the media to spotlight. When, for example, the Paradise Papers hit the headlines in November 2017, the big news was that racing driver Lewis Hamilton had avoided VAT on buying a private jet. The more important fact that one of the world’s largest accountancy firms and a supposed watchdog of capitalism, EY, had designed the scheme for him and others, including several oligarchs, went largely unnoticed.

Richard Brooks

While antitrust has become a hot topic in the tech sector, other branches are profiting from market concentration and oligopolistic arrangements as well. The Big Four auditing companies, despite their overt role of insuring proper reporting standards, have failed at this task numerous times without being held accountable; meanwhile, their consulting arms are helping corporations and rich people shield taxable incomes from authorities through various, albeit legal, loopholes. I would argue that this is a case where society would benefit from tighter government regulations, or even public agencies taking over some of the responsibilities of private auditing companies. Bureaucracy is often frowned upon, but if it improves tax collections and corporate governance, it might be well worth it.

A news ticker about the Lehman Brothers collapse in New York in 2008
A news ticker about the Lehman Brothers collapse in New York in 2008. Photograph: Alamy

Coincidently, Apple’s auditing firm is Ernst & Young, going back as far as 2009, when they replaced KPMG. I wonder which of them contributed to Apple’s Irish tax avoidance schemes

Targeting growth like any multinational corporation, despite their professional status, the big four continue to expand much faster than the world they serve. In their oldest markets, the UK and US, the firms are growing at more than twice the rate of those countries’ economies. By 2016, across 150 countries, the big four employed 890,000 people, which was more than the five most valuable companies in the world combined.

The big four are supremely talented at turning any change into an opportunity to earn more fees. For the past decade, all the firms’ real-terms global growth has come from selling more consulting services. Advising on post-crisis financial regulation has more than made up for the minor setback of 2008. KPMG starred in the ultimate “nothing succeeds like failure” story. Although – more than any other firm – it had missed the devaluation of subprime mortgages that led to a world banking collapse, before long it was brought in by the European Central Bank for a “major role in the asset quality review process” of most of the banks that now needed to be “stress-tested”.

The big four now style themselves as all-encompassing purveyors of “professional services”, offering the answers on everything from complying with regulations to IT systems, mergers and acquisitions and corporate strategy. The result is that, worldwide, they now make less than half of their income from auditing and related “assurance” services. They are consultancy firms with auditing sidelines, rather than the other way round.

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