Major shakeup is needed to fix the Big Four, expert says
A prominent academic has called on the government to expedite its audit reforms, after arguing a serious shakeup is needed to prevent an “appalling” situation from getting worse.
Speaking to Morning Wire accountancy expert Professor Atul Shah said, “the record of the UK’s auditing industry has been appalling over the last two decades and it’s getting worse.”
Pointing to major audit industry scandals, including the collapse of café chain Patisserie Valerie and construction giant Carillion, the professor said serious reforms are needed to prevent similar such scandals from happening in the future.
Shah added that reforming the UK’s audit industry could lead to a boom in investment in the long term, as he claimed such reforms would increase transparency and boost investor confidence in British companies.
The business expert said: “The operation of any efficient financial market requires good quality accountability and stewardship, and independent auditing is a very important part of that process of governance.”
Break up the Big Four!
In diagnosing the problems with the audit industry, Shah claimed there are major “conflicts of interest” in the UK’s biggest accountancy firms.
“They are commercial firms with a profit objective and therefore not independent in the way they audit their clients,” Shah said.
He added that the Big Four’s businesses selling non-audit and consultancy services undermine their objectivity, when it comes to auditing their clients.
“Essentially the big four accounting firms are private oligopolies,” Shah said. “There are significant conflicts of interest between the services they provide.”
The comments come after the US Securities and Exchange Commission (SEC) this week launched an investigation into the Big Four over conflicts of interest.
In Shah’s view, the only way to fix the problem is to break up the Big Four, by separating out their audit businesses.
The professor also called for serious reforms to the UK’s audit watchdog, as he claims the regulators have been “captured”.
“We’ve had a very broken system of regulation,” Shah said.
Shah noted that the board of the UK’s Financial Reporting Council (FRC) is filled with former Big Four executives, while others have been excluded from taking up senior positions.
“The drive is towards what I would call lowest common denominator regulation,” Shah said. “The public rhetoric is that we’re a tough country, but the reality is any cowboy is welcome here.”