Auditing watchdogs should remind the big four of their public duty

The audit profession plays a vital role in maintaining the integrity of global financial markets, but recent audit failures cast doubt on the fact that the largest accounting firms serve really the public interest.

On Monday evening, a US federal judge ordered PwC to pay $ 625 million in damages to the Federal Deposit Insurance Corporation for failing to detect the criminal fraud that led to the insolvency from Colonial Bank, one of the largest banks. failures of the financial crisis of 2008. (PwC plans to appeal.)

In the UK, the four big companies – PwC, KPMG, Deloitte and EY – are under surveillance following the collapse in January of the group of Carillion construction, which had 43,000 employees and will cost taxpayers at least £ 148m. Some MPs have asked the competition regulator to consider dismantling the quartet to separate their audit functions from advisory services, tax services and others. Other accounting scandals in India and South Africa have cast new doubts about the audit profession.

This is not a new problem. Before the mbadive bankruptcies during the financial crisis, the auditors did not warn investors. The International Forum of Independent Auditing Regulators has repeatedly found that the quality of auditing is unsatisfactory – its most recent inspections have revealed quality problems in two-fifths of the cases. audits that have been reviewed. The Financial Reporting Council of the United Kingdom said last month: "The four major auditing practices must act quickly to reverse the decline in this year's audit reports."

Each of the Big Four has been the target of action and inappropriately modified audit documents over the last three years. They are also grappling with conflicts of interest arising from the external work they perform for audit clients: each has settled actions related to breaches of the law. independence or resigned from a client because it provided non-audit related services.

The frequency of these deficiencies disrupts a former US regulator of auditing. To understand why they continue, one must understand the Big Four economic model.

Although companies have a public obligation to produce independent audits, they are paid by the companies they inspect, making them vulnerable to management pressures and prejudices. The Big Four today are not just accounting firms. Instead, they offer a wide variety of consulting and consulting services under one roof, including investment banking, badet management, legal services, cybersecurity, staff recruitment and more. , advertising and marketing campaigns. the Big Four, bringing significant annual revenue increases. Full details are not known because, in many countries, audit firms are not required to publish transparent financial statements. But it's no wonder that companies have focused on these business sectors, potentially at the expense of audit quality.

So what can be done to improve the quality of auditing and strengthen investor confidence? Over the years, suggestions have been made to replace the inherently conflicting issuer-pays model, to create uniquely audited firms, to dismember groups to ensure greater competition, and to force companies to change regularly. 39; listeners.

The EU is already trying mandatory rotation of listeners, but the other more radical proposals should not be approved in the near future.

However, there are more realistic actions that regulators should consider. First, watchdogs should force the largest audit firms to produce their own audited financial statements that are available to the public. This would promote transparency and help regulators and the public to monitor their activities

While the Big Four division is unpleasant, their non-audit activities should be limited to services closely related to auditing. Regulators should at the same time tighten the rules of independence and conflict of interest in order to prevent cross marketing and anticompetitive behavior.

On the government side, policy makers should ensure that regulators are independent of the profession. regulatory capture. Watchdogs should also focus their attention on the inspection and enforcement of larger companies and ask them to act faster to fix the defects.

Finally, listeners must be reminded of the role they must play. Regulators could create the equivalent of an oath of Hippocrates that would require all auditors, including business leaders, to attest to the public investor, not the chiefs of business. company, are their main customers. Auditors should also be required to reaffirm that they have a duty to badess whether a company will have a hard time staying afloat during the coming year and tell the public when they have concerns.

The Colonial and Carillion cases should serve as a call to strengthen regulation and reshape the culture of the profession of the auditor. It is time to act for fear of repeating the accounting scandals of the past.

The writer was a member of the Supervisory Board of Accounting US Public Corporations from 2008 to 2018