After Carillion, breaking up the Big Four is not the answer
Breaking up, as Neil Sedaka has said on more than one occasion, is hard to do. Saying you want to break up, though? Well, thats a heck of a lot easier.
When delivering their findings into Carillions demise last week, MPs realised that bayoneting the dead firms carcass was hardly a valuable exercise. Instead, they delivered a scathing attack on pretty much anyone else connected to the contracting and outsourcing giant.
The firms former directors, regulators and the government got a good kicking. But special criticism was reserved for Britains Big Four accountants.
It is time to break up the stranglehold of Deloitte, PwC, KPMG and EY, MPs concluded. Carve up what inquiry co-chair Rachel Reeves labelled a “cosy and complacent club” and the bean counters will put “genuine challenge and criticism” ahead of fat fees. The result: auditors will be much more likely to spot a Carillion-esque scenario in the future.
Read more: DEBATE: After Carillion, should we break up the Big Four accountancy firms?
This conclusion is clean and simple. It sounds great. But its riddled with more holes than Carillions balance sheet.
Breaking up the accounting oligopoly would shift the balance of power further in favour of company directors. Auditing minnows would be more (not less) inclined to please executive masters as their financial fate would be determined by holding onto audit mandates which represent a large proportion of annual revenues.
So what about conflicts of interest? At first glance, it doesnt seem right that the firm that prepares a companys tax affairs also signs off their validity as auditor. But the fact is these conflicts are heavily policed – both internally and externally – much to the chagrin of many partners. Just ask ex-KPMG bigwig Richard Fleming, who last year jumped ship after being exasperated with his former firms dominance in the audit market which prevented him from winning lucrative corporate finance jobs.
And where rules do allow accountants to do more than one job, the cross-sector knowledge within the same firm benefits the audit. It enables more (not less) challenge to potentially unscrupulous execs.
Over the weekend shadow chancellor John McDonnell pledged to dismantle Britains audit “cartel”.
“There will be no more Carillion scandals on Labours watch,” he said.
MPs need to be wary of unintended consequences. If ministers step in and break up the Big Four, it won't make it any easier to prevent a Carillion-style collapse.
Read more: MPs slam Carillion's 'rotten' corporate culture
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