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After more than four decades as a paid-up member of my profession it pains me to have to say goodbye. No, I am not retiring. I am on the brink of quitting. Why? Because I have had enough of the greed of my fellow senior colleagues in the profession that has gone unchecked by regulator and professional bodies. I am an FCA. That it should come to this is very sad but what is going on does not in any way represent the profession that I entered back in the 1970s. A small percentage of our number have trashed our profession’s reputation. They are leveraging vested interest to amass wealth in a dubious manner and on an unacceptable scale. The seeds of this have become increasingly visible in recent years. Carillion has thrown a spotlight on the sheer scale and extent. What has emerged recently is distasteful to say the least. It is an abuse of trust. It reveals a complete lack of integrity. It demands action by right thinking FCAs and ACAs.
Focused on corporate reporting of the UK’s major listed companies over the last decade, here at FutureValue we are more aware than most of the dominant role of the Big Four accounting firms. Almost without exception all FTSE350 companies – the UK’s largest publicly owned entities – have a Big Four Firm as their auditor. The other three of the Big Four then typically provide to that entity the lion’s share of a plethora of related non-audit services – internal audit, financial strategy, remuneration consulting, reporting advice etc. This oligopoly has been operating under a veil of respectability for some time.
It has been the collapse of Carillion and the recent full and frank parliamentary committee report on its demise that revealed the lengths to which these major accounting firms will go to sustain their revenues. One has audited Carillion for 19 years for fees of at least £20 million. Another had been Carillion’s internal auditors for a decade with reported fees of £10 million, while a third had been paid more than £18 million, of which nearly £11 million was in 2017/8 for turnaround advice. As the fourth firm was the least compromised among the Big Four at the time the music stopped, this firm was able to name its own fee for the liquidation. MPs on the parliamentary committees heard that it billed £20.4 million for the first eight weeks of the liquidation. Goodness knows where it will end up in total.
Discovering the questionable nature of some of these payments has certainly made me see red. The final payment of £2.5 million for failed turnaround advice was one of the last payments made by Carillion before its liquidation. The same firm advising on the failed turnaround was also advising a government agency on Carillion’s financial strength – surely a gross conflict of interest. The firm undertaking the liquidation had reportedly already received over £21 million in the last ten years from Carillion for provision of a range of non-audit services to the company.
As the layers are peeled away in the Carillion case, the incestuous nature of the oligopoly becomes clear. Will the provision of audit and non-audit services be different at other ongoing companies in the FTSE350, or for that matter in public sector entities or private companies? Probably not. Why? Because the two organisations that could have prevented all this from happening, or mitigated its excesses at least, the Financial Reporting Council (FRC) and the Institute of Chartered Accountants in England and Wales (ICAEW), appear to have been supine onlookers.
The seeding of the accounting and reporting regulator, the FRC, with senior staff hired from Big Four firms, along with ‘secondees’ from those same firms to help with its resourcing, have been part of a clique that some say has led to ‘capture’ of the regulator by the Big Four firms. If that is not the reality, then informed observers could be forgiven for mistakenly interpreting inaction to come to that conclusion.
Equally questionable has been the role of the principal accounting body, the ICAEW. Over the last decade the Institute could have applied pressure to help create more transparent, efficient and less oligopolistic competition for audit and non-audit services. It could also have been more sensitive to the evident denial of principles and lack of integrity. It could also have taken earlier steps as an authoritative independent and relevant body of some standing to question explicitly and overtly the actions and limited sanctions of the FRC. There is no evidence that it has until now.
There is little that stakeholders can do about the FRC. FutureValue has done as much as it can in its small way, setting out its considered thinking in responses to FRC’s occasional consultations on various reporting issues in recent years, while at the same time providing constructive criticism of the FRC in many of our regular blog articles for all to consider. We have to hope that the recently launched Kingman review of the FRC will lead to some, if not all of its shortcomings being addressed.
Arguably, the other by-stander, the ICAEW, is more culpable for allowing the culture prevailing in the Big Four firms to go unchallenged and unreformed. If it fails to curb the excesses and the demonstrated lack of principle among these firms then right thinking ICAEW members, who are surely in the vast majority – there are 147,000 of us in total – should, like me, consider their positions as members.
The Institute has its Annual Meeting on 5 June 2018. Will members grasp the nettle?