Published Thursday 28th November 2019
For many years, the accounting industry has been dominated by four major firms. EY, Deloitte, PwC and KPMG – known as the Big Four, they have provided accountancy services to many of the UK’s biggest companies. However, a string of high-profile failures, with errors in accountancy cited, has lifted the lid on what many see as a forced monopoly that has raised prices and lowered standards.
Earlier this year, the Competition & Markets Authority released its report into the statutory audit services market, calling for a radical reform of how these major suppliers operate. The damning report, if actioned, could transform how all major businesses deal with the auditing sector.
Major Accountancy Firms Under Pressure
Serious questions were asked following the liquidation of Carillion, who finally collapsed at the beginning of last year after months of financial irregularities. KPMG were investigated for their accounting practices with the firm and were regularly cited for their role in providing an unrealistic figure regarding the company’s health. Deloitte, the company’s internal auditor, was also accused of a failure to recognise the terminal signs in the company’s finances. Some accused both companies of prioritising their contracts over the health of the business.
The story’s momentum was restarted with the collapse of Patisserie Valerie, who went into administration in January this year. It emerged that “potentially fraudulent” accounting irregularities left a £94m black hole in the business’ finances, something former owner Luke Johnson pinned on auditor Grant Thornton. KPMG handled the administration services. The story again made mainstream news following the collapse of Thomas Cook in September. In the wake of the historic company’s closure, PwC and EY were questioned by MPs regarding their roles in managing the business accounts.
Fixing Accounting Industry Problems
Many of the concerns regarding the Big Four’s involvement in these collapses regarded the money earned whilst the companies headed towards closure. In the case of Carillion, KPMG earned around £1.5m for signing off on financial reports that would prove to paint an unrealistic figure, whilst other accounting firms also profited.
However, the biggest concern revolves around potential conflicts of interest involving these major auditing firms. In many of the above cases, these accounting firms also made money by providing consultancy services that could be judged to conflict with their roles as auditors. For example, PwC was paid to advise on the size of executive bonuses for Thomas Cook whilst auditing a business that would soon go into administration.
This conflict of interest formed the bulk of the CMA report into the industry, published in April of this year. The government report called for a clear separation of the Big Four’s auditing and consultation work, to try and raise the reliability of each company’s accountancy work. The report also looked at trying to reduce the barriers of entry for major accounting work, given the relative majority these four businesses have on the finances of the UK’s biggest firms. To combat this, the CMA recommended the introduction of mandatory joint audits, where a ‘challenger’ accountancy firm has to be involved with the management of company accounts alongside the Big Four firm.
What to Expect from the Future of UK Accounting Industry?
Despite this report being released in April, legal actions regarding its findings have been slow at best. This reluctance to take action leads many to believe that despite the apparent issues, change is not to be expected shortly.
One of the biggest obstacles to this change is the fact that the Big Four are huge multinational companies. The CMA used the term ‘operational split’ in their report, as opposed to the structural split demanded by certain stakeholders, as it is almost impossible for the UK Government to enforce such action. There are also concerns from the wider auditing industry about the proposal for joint audits, with many believing they will cause an unnecessary burden for businesses.
As with many issues currently being faced by UK business, there is a general feeling that the problem has fallen down the priority list when it comes to Parliament. With the General Election and Brexit dominating much of the agenda, along with a desire to work more with international partners like the Big Four, it’s increasingly unlikely that the industry will achieve the change it needs over the short term.
If you are looking for support with reducing your overheads in this turbulent period, consider us at Expense Reduction Analysts. We are specialist cost reduction consultants who have worked with a range of major UK businesses to help refine existing procurement strategies. Our teams have experience in a variety of industries and have already saved millions of pounds through effective long-term procurement strategies. If you’re interested in seeing what we could do for you, why not get in contact with us? Alternatively, discover our many case studies, highlighting the work we’ve done in a range of areas.