Three little piggies or we all fall down and then what?

A couple of weeks ago Jim Peterson digitally urinated all over a piece in AccountancyAge about the Big Four and whether one would fall. In the process, he took a mild swing at Francine and my bet on the same topic. Jim is blunt and to the point. He says not if but when (as have Francine and myself):

While no insider will say so in public, senior risk managers acknowledge that in the coming turmoil of another Big Four failure, the prospect that three survivors would stay in today’s business by accepting further concentration of exposure and liability will be untenable.

That a fundamental re-structuring of the profession will occur is beyond debate – and is nothing new – although answers will only lie in the readiness of all interested parties to get past the posturing to offer constructive, achievable solutions….

…The only alternative to a highly-disruptive disintegration of the large firm networks – and a long shot wager indeed, requiring the most wild optimism to imagine – would be the emergence of Big Four leadership prepared to engage, for the sake of their future, in the “creative destruction” brought forward in 1942 by economist Joseph Schumpeter.

He then goes on to outline what a new form of assurance might look like. It is tantalisingly long on broad strokes and short on detail. But then that’s not entirely unreasonable since Jim’s opening position is that the real question should be: ‘What Next?’

Cycling back a moment, while Jim has problems with the AA piece I find the article’s internal logic bizarre. Postulating that somehow three is a ‘magic number’ in all markets that equates to equilibrium may be demonstrable by example but has no validity in a market that has outlived its usefulness. In recent times when I’ve spoken with ICAEW people on this topic, some find it almost impossible to imagine a world without the current structure of audit as we know it. Others simply look puzzled. Still others think that if one of the majors fell then the people would be absorbed by one of the others. The common thread is that regardless of what happens then somehow it’ll all work out alright on the night and we’ll return to business as usual. The weight of evidence coupled with disillusionment suggests otherwise.

In the alternative, I am increasingly reading and hearing about companies that are actively considering forms of self regulation where they act in concert to achieve a common good. This is taking many forms but among those leading the charge are companies engaged in figuring out what a sustainable future might look like. Check this from James Farrar:

…in these times it is proving both, possible and necessary, to take the invisible hand out from behind the veil and steer our economic base to safer shores. It is possible for the business community to act, truly as if a community, to rebuild the structures of the global economy. This means looking not only to, but also far beyond, the pursuit of a few incremental stimulus dollars, towards building a whole new economic future. These new leaders are capable of working confidently with policy makers to charter a fairer economic system in preference to surrendering our destiny to be determined alone by market forces. This is what may just explain the recent actions of Sun or Symantec or J Sainsbury and represent the green shoots of a new type of corporate sustainability leadership. Such leaders believe we can reset our economy, not because we reject market ideology, but precisely because� we so faithfully believe in the innovative power of the markets to help get us where we need to be.

What on earth has this to do with audit you might imagine? If we believe that audit as we know it is done then what function might the firms of tomorrow perform that builds upon audit principles in this brave new world? If sustainability driven economics represent the principles that will drive future wealth then that adds a dimension to assurance we have yet to explore. I know of work being done where results are surprisingly good. One person recently described the assurance process for the company’s sustainability report as the equivalent of an anal probe. Hardly pleasant but darned thorough and ultimately one that means assurance upon which we can all count. That’s a good thing.

The problem as so often seems to be the case is that the profession doesn’t have a position, let alone one that makes sense on what happens next. Instead it continues to argue out of an old mindset that seeks to preserve the status quo. Given ongoing debates about mark to market, IFRS and XBRL implementation that should not be surprising, even if these are ultimately a convenient form of distraction.

But just as many believed that GM could never be allowed to go bust, its current prospects look bleak. If as seems likely it will fail, then GM will emerge as a very different business, most likely one built upon sustainable principles. There doesn’t seem to be another option that makes sense. Why should audit be any different?

There is however a pre-condition to the emergence of new forms of assurance and the firms that will lead the charge. We have to get away from the constant threat of litigation. That can come in part through the establishment of enforceable principles that matter and which are not so convoluted as to lead us up the gaming path. But in part it is going to require a change in mindset where the default position for anything that has a whiff of problem means that someone gets sued. It’s not tenable as an environment in which to thrive. Since a significant element in sustainable practices rests on the notion of collaboration, I suspect we will need to re-learn what it means to trust and while we’re at it, snuff out the ambulance chasers.

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Tagged as: big four, ICAEW, IFRS, Sustainability, XBRL