BRITAIN’S Big Four accountancy firms have been accused of using “blackmail” and “propaganda” to cajole the UK government into limiting their liability for poor-quality auditing, a leading academic has claimed.
Prem Sikka, professor of accountancy at Essex University, said the firms — PriceWaterhouseCoopers, Deloitte, KPMG and Ernst & Young — are scaremongering to ensure they don’t have to pick up the bill for their own mistakes, while leaving out in the cold customers, policyholders, shareholders and staff of firms that go bust despite having “healthy balance-sheets”.
He said: “The auditing industry’s ultimate aim is to use the British state to shield it from the consequences of its own failures. Their aim is to enjoy the state-guaranteed monopoly of external auditing with little or no obligations to stakeholders.”
The Big Four have for some months been seeking to persuade the government to impose a “liability cap” that would cut their liability when they lose claims for auditing negligence.
They have painted an apocalyptic picture, arguing that multinationals would find it increasingly difficult to get a proper audit, and that the entire corporate world might collapse, were one of the Big Four allowed to follow collapsed global group Arthur Andersen down the tubes.
The accountancy firms argue that in a Big Three scenario, client conflict — whereby two client companies in the same sector, such as two banks, cannot use the same auditing firm — would become so restrictive that some businesses would find themselves without auditors.
Ian Robertson, president of the Institute of Chartered Accountants of Scotland (ICAS), who is also chief executive of housebuilder and construction firm Wilson Bowden, recently said: “Given the low number of participants in the global audit market we are concerned that any further reduction would have severe consequences for financial reporting and the UK and global economy.”
Prem Sikka: the world won’t end if we have fewer than 4 global accountancy firms
But Prem Sikka said: “We have been told our world will come to an end if there are less than four global accountancy groups. But that is rubbish. In the US we have, since April, been having a living laboratory.
“Ernst & Young has been banned from taking on any new audit clients for the past six months [so only three of the Big Four are taking new clients there] and the world hasn’t ended. The mid-sized audit firms are flourishing.”
Trade and industry secretary Patricia Hewitt has, for the time being at least, resisted pressure for a liability cap but has said the government will consider introducing the concept of “proportionate liability” in revised Companies Acts.
But Prem Sikka warns that even this measure, which would see auditor’s liability shared with other industry players, will do nothing to improve the quality of UK auditing.
Writing in a monograph (“Race To The Bottom“) published this week by the Association for Accountancy & Business Affairs, Prem Sikka said: “With reduced liability, auditor incentives to deliver good audits are diluted. Nothing has been done to make auditors responsible for the consequences of their shortcomings or enhance stakeholder rights.”
In the document, co-written by Austin Mitchell MP and Jim Cousins MP, Prem Sikka adds: “In an environment where partners are incentivised to sell consultancy services to audit clients, lax liability rules are bound to make firms reckless and lead to more scandals.”
In he document the authors accuse E&Y and PwC of “hiring” the legislature of Jersey to enact a law on limited liability partnerships (LLPs) that would suit their interests. “Their strategy was to use Jersey, a tax haven, as a lever to secure LLPs in the UK. It paid rich dividends.”
Prem Sikka is disappointed the House of Commons select committees have failed to properly examine the accountancy firms’ role in facilitating tax avoidance or audit failures. He is also disappointed that the UK government has not followed the US government in taking a harder line in limiting their activities.
He said: “The problem faced by the government is that it is relying on the major firms for flagship policies such as the public private partnership and private finance initiative (PPP/PFI).
“If the government shows the accountancy firms to be immoral, then the public’s response would be to think these flagship policies, underpinned by the accountants, must also be suspect.”
This article was published in the Sunday Herald on 17 October 2004. It was the first time I spoke to professor Prem Sikka.