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Preliminary report calls Big Four a “cartel-like group”

*A draft of this article was wrongly published on our website on Monday 23 October*

The Maturity Institute, a not for profit company which rates how well organizations are performing today and the probability that they will continue to perform and grow in value, has released a preliminary report on the Big Four accounting firms painting a picture of a “cartel-like group” guilty of “poor governance, skewed value motives of partners, avarice, ineffective governmental and regulatory control, obsolete accounting and auditing practice”.

The preliminary report, Auditing the “Big 4” Accounting Firms, read: “The Big Four are more of a fragmented, ‘franchise’ of individual firms than their branding portrays to external stakeholders. Such fragmentation militates against the highest assurance standards being applied consistently. […] the present arrangements actually undermine any impression of market dominance being justified by a cohesive market.”

The Big Four has sought to influence global regulatory bodies such as the UK Financial reporting Council (FRC) and the wider system network has become complicit in lowering audit quality standards and placing partner interests above all other stakeholders, the report continued without giving any particular example or evidence.

A UK FRC spokesperson told this publication: “The Financial Reporting Council was sent a copy of The Maturity Institute’s report on Auditing the Big Four Accounting Firms and we are assessing the conclusions and reviewing the methodology.  As the Competent Authority for Audit in the UK any suggestion that we are complicit in lowering the standards of audit quality and placing firms’ partner interests above their stakeholders is entirely unfounded.”

Maturity Institute chair Paul Kearns said: “This report provides a unique, evidence based analysis of the serious societal risk arising from the accounting profession. The Big Four represent a systemic problem that needs fixing and our report shows how this can be done through the firms themselves, their regulators and other stakeholders such as the investment sector, which is so reliant on assurance provided by auditors.”

At the heart of the issue is the catch-22 situation for organisations where the goal of maximizing a partner’s fee income is bound to conflict with their cited goal of acting in the public interest.

“The Big Four trumpet their revenue growth as though that, in itself, is a measure of its worth to society rather than just an indicator of a business model that focuses solely on revenue,” the report read.

This catch-22 situation affects all service lines, the report argued, rendering external auditing a conceptually flawed and dubious practice and tax advisory a “lucrative revenue for partners, a zero-sum game for society”. However the report doesn’t go into details as to show the dubiousness and flaws of audit.

The report also put some blames on professional bodies and regulators for the current state of affairs: “The timidity and inaction on the part of the authorities has sent a clear signal to the Big Four that they are now too big to fail; thereby reinforcing and sustaining the power of the partners to this global cartel to behave almost as they please.”

In its report the Maturity Institute also criticised professional bodies for failing to enforce standards and safeguard integrity. In particular the report questions the ACCA code of ethics “which puts no responsibility on accountants to put society first”.

It said it had found no evidence in the ACCA’s code of ethics to suggest that the ACCA tackles the question of immorality or ethics when it comes to taxation and that as long as members are compliant with the law that is enough. “No accountants have been struck off when partners are fined. Instead ‘severe reprimand’ is typically the order of the day,” the report read.

An ACCA spokesperson responded: “The comments presented by the Maturity Institute are unsubstantiated and untrue, as any more than cursory look at ACCA’s Code of Ethics, Rulebook, disciplinary process and Professional Conduct in Relation to Taxation requirements would demonstrate.”

ACCA requires all students, members and affiliates and firms to act in the public interest at all times, the spokesperson continued. “ACCA’s Code of Ethics outlines that the accountancy profession as a whole holds a responsibility to act in the public interest. Section 100.1 elaborates that, therefore, ‘a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer’.”


Letter to the editor: ACCA comment on the Maturity Institute report


Report co-author, and a former Arthur Andersen staff, Stuart Woollard said: “If they had an underlining code of ethics which puts society at the heart of what they should be contributing to or benefiting, and we define it in the form of total stakeholder value, then it does question a significant proportion of the tax advisory business within the accounting industry.”

The Maturity Institute’s report argued that until whole system, integrated reporting becomes the norm we will not be able to place sufficient trust in organisations, their accountants and auditors.

However the Maturity Institute also criticised the International Integrated Reporting Council’s framework arguing that it is just looking at adding columns for extra capitals rather than seeing them all as a holistic picture.

“The conceptual basis for <IR> is flawed, the theory questionable and the practice non-existent,” the report read. “It has yet to produce a single example of a report that effectively integrates all of its 6 Capitals: with human capital value notably absent from all reports to date.”

A spokesperson for the IIRC responded that Integrated Reporting had been endorsed by the most serious policymakers, businesses and investors in the world.  “Mark Carney, Chairman of the Financial Stability Board, sees it as a vital way of extending the conversation about value creation beyond financial capital so that business is accountable for social and other sources of value,” the spokesperson said. “Over 1,600 companies across 62 capital markets are today adopting Integrated Reporting, including some of the most iconic organizations in the world - Tata Steel, Unilever, Mitsubishi Corporation and The World Bank.  The largest equity investor in the world, BlackRock, serves on the IIRC's global Council.”

The number of companies still interpreting the framework as separate reporting of the six capitals is reducing year by year, just as the overall numbers adopting integrated reporting are increasing, the spokesperson continued. “The <IR> Framework does not request them to report on all six capitals, but only on those genuinely material to how their organization creates value over time. Furthermore, we do not ask businesses to call them 'the capitals' so whilst there are many reports out there that look at human capital, they may not refer to it as such.”


Letter to the editor: IIRC comment on the Maturity Institute report


As part of their work the Maturity Institute gave the Big Four firm an Organizational Maturity Rating and found that all four rated at or below “junk” grade, reflecting material value loss arising in total stakeholder value terms.

“This means that value loss and risk probability is severe, with high materiality,” the report read. “We expect audit failures to remain at current levels with the possibility of extreme cases arising. In short all are carrying significant risk as the causal factors inherent within Arthur Andersen at the time of the Enron scandal continues to exist in each firm today.”

Kearns who co-wrote the report told this magazine: “Our report is intended to open up the dialogue and debate on this crucial issue and the Maturity Institute is taking a vigorous lead with this report in asserting Total Stakeholder Value as the ultimate goal.”

This has very serious issues and let’s find a way to resolve them, Woollard said. “Because from my professional standpoint the accountancy industry is increasingly seen as something which is undesirable.”

At the time of publication, PwC declined to comment and all other Big Four firms had not responded our call for comment.

Analysis
The Maturity Institute’s report looks at a number of valid issues, in particular the way the Big Four portray themselves and how they act in practice, the allusion to their powerful lobbying machinery, and the strengths and weaknesses of regulators in the overall landscape.

But the report oversimplify these issues without bringing any evidence or facts to back the rhetoric up.

As one of our magazines’ readers, and a sharp observer of the profession, told us in a private conversation: “There are aspects that they definitely grasp — many that track my own views. But it’s a challenge to see through the combination of over-heated rhetoric, mediocre writing and some serious gaps in comprehending what the remit and social expectations are of the profession, coupled with the proposition that to “get it,” the reader is invited to subscribe to their approaches and methodologies (with fees, of course).”

For all the above, the report, which is now on sale for £15 (disclaimer: our magazines received a free copy), does more harm than good. The lack of solid arguments discredits the issues which if addressed by the profession would go a long way in creating a healthier environment.

*A draft of this article was wrongly published on our website on Monday 23 October*

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