This article was first published by POLITICO Pro on October 24. Access the orginal article here.
By KEVIN DANCEY
Recent news of some high-profile corporate collapses such as the U.K.’s Carillion have, yet again, spurred calls to break up the so-called Big Four accounting firms — Deloitte, EY, KPMG and PwC — to increase competition among them and restrict auditing to ‘audit-only firms.’ Suggestions that the large global audit networks are too big, too diversified, or too tightly woven into the fabric of financial markets abound.
But these proposals fail to recognize that the growth of these firms into multidisciplinary networks is a direct reflection of the market demand for global reach and specialized expertise required to conduct high-quality audits of today’s large, increasingly complex, multinational companies.
The loudest, and perhaps most dangerous call is one that dates back almost a decade —the suggestion that audit firms should only perform audits. Raised by the European Commission in the aftermath of the financial crisis, the audit-only firm idea was rejected at the time as untenable.
The Commission and many others recognized even then, with the damage from the financial crisis still fresh, that splitting auditing from non-auditing businesses would not help enhance audit quality, attract the right talent, or increase competition. It would have the opposite effect, harming the industry as a whole.
Specialists are increasingly central to audits. Rapid technological advances, complex global business models, and the thirst for greater financial disclosure continue to amplify the breadth and complexity of financial statements and their audits. To challenge and probe management, auditors must be able to draw on a range of specialists from big data professionals to experts in taxation, forensics, fraud and valuations.
Moreover, independent audit stakeholder research commissioned in 2016 by the U.K. Financial Reporting Council and Institute of Chartered Accountants of Scotland found that keeping this talent within firms for audit support alone does not provide the depth of experience necessary for successful audits and is “not a viable business model,” because their audit work alone is not extensive enough to retain and develop these experts. The multidisciplinary approach, however, allows these experts to continually hone their skills through non-audit consultancy contracts.
But a multidisciplinary model isn’t enough. A high-quality audit also stems from a consistent culture of ethics and integrity throughout the entire firm and across all of its service offerings. Maintaining a full range of expertise in-house is important to ensuring a consistent culture of quality throughout the firm, and such values must be backed up by the right governance, incentives and financial rewards. A firm with one set of values for the audit practice and a different culture or set of values for other business lines is simply not appropriate.
As audits become increasingly complex, sound regulation is an imperative. The public interest goal for audit regulation must always be to ensure that independent, high-quality audits of today’s large, complex businesses are delivered to investors and the public. Effective oversight plays a critical role in getting this right.
Such oversight needs to take the form of inspections performed by independent audit regulators, ensure robust auditor independence from any undue influence — whether from clients, interests, relationships or other services — and follow requirements set by standards boards that are independent of the profession.
The questions being raised in the wake of the corporate collapses are fair, but we should resist the recent call for returning to audit-only firms. The simplicity may sound tempting, but the model itself is out of touch with the reality of large businesses today.
There’s nothing simple about them.
Kevin Dancey is the incoming CEO of the International Federation of Accountants.