The big 4 accounting firms pwc, deloitte, kpmg and ey must split up in the uk due to recent scandals.
The big have until June 2024 to separate their audit and consulting businesses in the UK. The financial reporting council is the governing body that is calling for the break up of the big 4.
Wirecard is just the latest scandal that is prompting this action where supposedly more than 2 billion dollars went missing through accounting fraud.
Why is the FRC calling for this. This isn’t the first time this happened. Something similar happened after Enron collapsed in the United States. The big 4 got rid of their consulting arms to appear independent from their audit clients. Deloitte was the only firm to keep their consulting practice. The big 4 ultimately ended up rebuilding their consulting firms again.
Now they are supposed to dismantle them in the UK. It is still unclear how this will work. The big 4 have until October 2020 to come up with an operational way to separate their audit firms. I’m sure the big 4 will come up with a structure where they keep their consulting firms and just rebrand them or put them in a separate building. The big 4 are not going to be giving up their consulting arms just to appease regulators.
This just shows how Europe is different than the U.S. The UK and europe is much more in favor of bigger government. The United States has the same number of scandals as Europe. It’s just that Europe is more favorable towards regulation. The implementation of this plan will be a nightmare.
I think this is a step in the right direction but it will not solve the problem. The biggest problem facing big 4 accounting firms is their profit goals for partners. Partners have to have a certain amount of revenue under management in order to stay partner. Many times the big 4 will promote a partner who isn’t ready and force them to find new revenue. If your primary goal is revenue so that you don’t lose your job or big paycheck, then ethics go onto the back-burner. The big 4 are a confusing industry. In one sense they are basically government run entities. Everything they do as audit firms is regulated. However, they are also profit driven. These two principles come into conflict consistently. Why would you push back on a client that is in charge of how much you get paid. Many clients also don’t like paying for people to count beans, so they push back on audit fees each year. The way the big 4 make up for this is through consulting work. Even for the big 4, audit work is seen as boring monotonous work. It is the work that keeps the lights on, but it is not where the true growth is. The true growth is in consulting work.
The way you stop fraud in accounting and the big 4 is by hiring ethical people. You must also reward ethical behavior. If someone acts with integrity and reports bad behavior, they should be rewarded. Unfortunately systems aren’t set up for that behavior, so fraud in accounting will keep occurring. Don’t believe me? Wait until you join an accounting firm or accounting department. It is hard to report unethical behavior. I know from multiple personal experiences.
The main things that will come out of this news is increased regulation. There will be increased regulations on the big 4 and on public companies around the world. This means that audit fees are likely to go down as less companies will want to go public to avoid increased regulation. You will see more large companies stay private for longer periods of time. Additionally, big 4 firms will focus less on audit fees.