In the Big Audit model—by which the world’s large public companies engage the international networks of the Big Four to provide financial statement assurance for their use and that of the capital markets—the Big Four had collective 2018 worldwide revenue exceeding $143 billion. How confident can investors be that the Big Four have provided a level of assurance commensurate with these fees?
In the United States, because the incidence of financial malfeasance is a trailing economic indicator, the resilience of the securities indices has meant a period of relative quiet. Further muting the rhetoric is the somnolent attitude of the major American regulators, notably the wholesale turnover of the members and senior staff of the PCAOB that has made it essentially a high-salaried housekeeper.
What should be expected? Recent disclosures about Under Armour’s revenue recognition and Mattel’s accounting for taxes have put PricewaterhouseCoopers and the profession back under the spotlight; the next outbreak of corporate chicanery—inevitable but on an unpredictable timetable—will only turn up the wattage.
U.K. Developments
Public perception and attitudes vary across the globe. The United Kingdom, where the modern audit function was invented in the mid-19th century, differs considerably from the United States. There, the environment has been aflame for two years, bracketed between the collapse of Carillion in January 2018 and that of travel services giant Thomas Cook in September 2019. Pending for mid-January release is a report from Donald Brydon, former head of the London Stock Exchange, on his broadly conceived Independent Review into the Quality and Effectiveness of Audit, a mission launched by the government’s Secretary for Business. In December 2018, a committee charged by Parliament and headed by City grandee John Kingman issued its report, adopted by the secretary, recommending wholesale restructuring of the Financial Reporting Council (FRC), the country’s audit regulator. Kingman characterized the FRC as a “ramshackle house built on weak foundations,” and his report proposed it be supplanted by a new Audit, Reporting, and Governance Authority (ARGA). Two other reports in April 2019 are also in the mix, from the Competition and Markets Authority (CMA) and Parliament’s select Business, Energy and Industrial Strategy Committee (BEIS). On the regulatory and professional oversight front, implementation of Kingman’s lesser ARGA recommendations, which do not require legislation, has proceeded apace. More consequential restructuring and broadened agency authority will depend on unblocking the country’s Brexit-based legislative paralysis. Meanwhile, the headline proposals with the highest potential impact on accounting firms themselves are as follows:- Two from the CMA: first, required “joint audits” for most of the FTSE 350 companies—that is, two audit firms, of which one would be a non–Big Four challenger, would share engagement execution and responsibility. Second, the Big Four would undergo an “organizational split” between their audit and other practices, including separate management, governance, and financial statements, and would forego cross-practice profit sharing.
- The BEIS committee, endorsing the CMA’s joint audit proposal, would go further—full legal separation of the Big Four’s audit practices, enforced reduction or caps on their dominant share of the large-company market, and shortened limits on the duration of audit engagements.
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