The other week, Francine McKenna predicted: When another one bites the dust:
I say “when” not “if” since Jim Peterson and I agree most strongly on this:
Another large firm will fail soon.
Soon, to me, means in 1-3 years, not 5-8 or 10-13.
That’s one heck of a prediction but it raises the question what happens next? If, as Francine says, one of the many lawsuits currently on the go does kill off one of the Big Four then some interesting scenarios become possible. Earlier today, Francine and I discussed this and the conclusion I/we reached is that it could signal the end of auditing – at least as we know it.
Francine and I agreed that almost no-one we know reads audit reports. Or if they do, then it’s only when there is a qualification because you just know that it must be serious. Yet we still see continuing frauds and other catastrophes. It begs the question: why do we have audits anyway? Are they really serving any useful purpose for most investors, customers, suppliers, banks etc? Jim Peterson thinks not but that in the US at least, government simply hasn’t thought this through:
Put another way, those sincerely believing in the importance of large-company assurance are avoiding an election between two unappealing choices: Either put every effort to assure that the Big Four are insulated from the very catastrophic risks that the critics insist they must remain exposed to, or start the process of designing the new audit model that must arise after the collapse of the Big Four under the abdication of the Treasury Committee and its counterparts.
In the loud clanging of the Committee’s cognitive dissonance is the tolling of its usefulness. Chairman Nicholaisen’s concession of futility in the face of catastrophic risk says as much.
Prem Sikka thinks that auditors work under a different regime to the rest of us when it comes to accountability:
There is hardly any evidence to show that the UK fines are effective or have resulted in any improvement in audit quality. Despite recurring failures, no partner from any major UK auditing firm has ever been banned from practising and no major firm has ever been suspended from selling audits. Most stakeholder lawsuits against auditors are barred after six years, and the much-delayed disciplinary findings are of little use to them. In any case, generally auditors only owe a “duty of care” to the company as a legal person and not to any individual shareholder, creditor or other stakeholder who may have suffered loss as a result of auditor negligence.
In the UK, most arguments for an alternative favour a state sponsored model but to me that is recipe for disaster. What’s the alternative?
If you believe that de facto, we live in an era of meket driven economics then it follows the market should decide. Given free rein, I’d expect to see a completely different type of framework where the interests of investors are protected by measures that have real teeth. Not because it is mandated but because the market will decide. That raises all sorts of spectres, not least the extent to which the systems which support the global economy will come under scrutiny. We already know they are brittle. We already know that smart people can and will dance around them. The profession just isn’t equipped to understand or respond to the problem. So why are we kidding ourselves that audit matters – at least in its current form?
Unfortunately, given the lobbying power of the Big Four, it may well take a catastrophic failure to bring them to the table to understand that the gravy train is coming to a grinding halt. That’s what Francine believes and I have a feeling she’s right.
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