tag:theconversation.com,2011:/global/topics/auditors-3533/articlesAuditors – The Conversation2023-05-25T12:05:45Ztag:theconversation.com,2011:article/2054352023-05-25T12:05:45Z2023-05-25T12:05:45ZUS banking failures: the role of big auditors in another financial crisis<p>Three recent and very serious US bank failures – Silicon Valley Bank (<a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">SVB</a>), <a href="https://theconversation.com/why-svb-and-signature-bank-failed-so-fast-and-the-us-banking-crisis-isnt-over-yet-201737">Signature</a> and <a href="https://www.bbc.co.uk/news/business-65445427">First Republic</a> – have one common denominator: all three businesses were audited by one of the world’s major professional services firms, KPMG.</p>
<p>The company has stood by its audits of the first two banks, which collapsed soon after publishing financial reports certified by KPMG. <a href="https://www.ft.com/content/1f21169f-da29-4e74-af79-0f9230eb873e">The FT reported in March</a> that KPMG chief Paul Knopp said:</p>
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<p>As we take into account everything we know today . . . we stand behind the reports we issued and we think we followed all professional standards.</p>
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<p>Now lawsuits have been filed against KPMG <a href="https://www.reuters.com/legal/first-republic-kpmg-are-sued-concealing-banks-risks-2023-04-25/">over its audit of First Republic</a>, as well as over <a href="https://www.cfodive.com/news/new-svb-shareholder-suit-cites-kpmgs-silence/647275/">SVB’s collapse</a>. And the issues are not confined to one audit company. In fact, a series of scandals have engulfed members of the “big four” accounting firms of KPMG, Deloitte, Ernst & Young (EY) and PriceWaterhouse Coopers (PWC), which dominate the industry.</p>
<p>In recent years, <a href="https://www.ft.com/content/bcadbdcb-5cd7-487e-afdd-1e926831e9b7">EY has been criticised over its audits</a> of failed financial firm Wirecard, as has Deloitte over its audit of transport company <a href="https://www.ft.com/content/7c4979df-1fc5-419d-80ec-241a97da381f">Go Ahead</a>. More recently, PWC’s Australia CEO resigned this position after <a href="https://theconversation.com/pwc-scandal-shows-consultants-like-church-officials-are-best-kept-out-of-state-affairs-205560">reports of conflict of interest</a> in terms of tax advice given to private clients. </p>
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Read more:
<a href="https://theconversation.com/pwc-scandal-shows-consultants-like-church-officials-are-best-kept-out-of-state-affairs-205560">PwC scandal shows consultants, like church officials, are best kept out of state affairs</a>
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<p>I have <a href="https://www.taylorfrancis.com/chapters/mono/10.4324/9781315228754-4/chemistry-audit-failure-atul-shah">researched similar issues</a> to those being discussed today – in particular, whether auditors should have reported warning signs to regulators before the 2008 global financial crisis. Even with new regulations having been imposed since then, the industry needs a radical overhaul to become more transparent, competitive and accountable.</p>
<h2>What do auditors do?</h2>
<p>Audits provide an independent, professional endorsement of an organisation’s own financial reports. As such, auditors get special access to a company’s board and detailed information on its finances, risks and activities. </p>
<p>They have the opportunity to ask challenging questions and interview influential people within the audited company about their actions, strategies and forecasts for the future of the business. They are trained to undertake forensic analysis and question management on their risks and performance.</p>
<p>Large auditing firms often work with a significant proportion of an industry. KPMG is believed to <a href="https://www.ft.com/content/feb33914-493e-467c-b67e-28fcd1b3814d">audit more US banks</a> than any of the other big four accounting firms, for example. This gives an auditor a unique view of the risks and opportunities in an industry, as well as the stresses and strains in various parts of a market. </p>
<p>So, in theory, auditors should be able to issue warnings – to regulators for example – about hidden or as-yet unidentified risks, as well as endemic false accounting. This would not only protect shareholders, employees and investors, but also society in general, from the collapse of a large company or an industry crisis.</p>
<h2>A troubled history</h2>
<p>After the 2008 global financial crisis, <a href="https://www.taylorfrancis.com/chapters/mono/10.4324/9781315228754-4/chemistry-audit-failure-atul-shah">I researched the role of KPMG</a> in the largest ever corporate failure in British history: <a href="https://www.bbc.co.uk/news/business-34859067">the near-collapse of HBOS bank in 2008</a>. As the <a href="https://publications.parliament.uk/pa/cm201617/cmselect/cmtreasy/582/582.pdf">fifth-largest bank in the UK</a> at the time, HBOS had assets of £690 billion.</p>
<p>My research indicated several strong signals of management hubris inside HBOS before its collapse: fast-paced growth, increasing inter-bank borrowing, and high-risk commercial property lending during a market bubble. </p>
<p>The bank’s <a href="http://news.bbc.co.uk/1/hi/uk_politics/7882581.stm">ex-head of group regulatory risk</a>, Paul Moore, said he had raised concerns about “<a href="https://www.independent.co.uk/news/business/news/hbos-collapse-kpmg-may-face-inquiry-over-its-role-in-the-lender-s-collapse-a6741391.html">excessive risk-taking and mis-selling</a>” internally, but was ignored and then sacked in 2004. An investigation by KPMG <a href="https://www.thetimes.co.uk/article/hbos-whistleblower-queries-kpmg-independence-zpg6mqfvrzq">dismissed Moore’s claims</a> in 2005, three years before the bank’s collapse.</p>
<p>In 2017, the Financial Reporting Council (FRC), the audit sector watchdog, <a href="https://www.frc.org.uk/news/september-2017/closure-of-investigation-into-kpmg%E2%80%99s-audit-of-hbos">cleared KPMG of misconduct</a> in relation to its work on HBOS’s financial reports, before the bank’s failure. <a href="https://www.theguardian.com/business/2017/sep/19/kpmg-cleared-in-hbos-audit-investigation">In a statement</a> reported at the time, KPMG said it was pleased with this conclusion, adding:</p>
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<p>We have always maintained that our audit was robust and undertaken in accordance with the regulations and practice of the time.</p>
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<p>But a separate House of Lords select committee <a href="https://publications.parliament.uk/pa/ld201011/ldselect/ldeconaf/119/11910.htm">investigation into bank audit failures</a> after the 2008 financial crash concluded that the audit market is highly concentrated and uncompetitive. And the big four accountancy firms still dominate the audit industry for large, powerful multinational corporations to this day – despite lots of smaller firms providing the same services. This may in part be because the big four offer a vast range of commercial services and expertise on laws and regulations. </p>
<p>But my research has indicated instances of “<a href="https://www.academia.edu/19497525/KPMGS_REGULATORY_ARBITRAGE_CULTURE">regulatory arbitrage</a>”. This is when an audit firm uses its knowledge of the rules – on taxation, for example – built up in other parts of its business to help clients avoid certain costs and restraints. </p>
<p>This is legal, but can undermine business regulations by giving some firms an unfair advantage due to unequal access to professional advice. (KPMG did not provide a comment when asked about this issue.) </p>
<p>This is why I believe large, private, commercially minded firms with a range of advisory services cannot be relied upon to police other multinational corporations. Audits of systemically important institutions such as banks – the failure of which can trigger the collapse of an entire economic and financial system – should instead be undertaken by state auditors. </p>
<figure class="align-center ">
<img alt="Overhead shot hands using calculators, papers and laptops." src="https://images.theconversation.com/files/526779/original/file-20230517-13414-luw1sy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526779/original/file-20230517-13414-luw1sy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=336&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526779/original/file-20230517-13414-luw1sy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=336&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526779/original/file-20230517-13414-luw1sy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=336&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526779/original/file-20230517-13414-luw1sy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=422&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526779/original/file-20230517-13414-luw1sy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=422&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526779/original/file-20230517-13414-luw1sy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=422&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/auditors-calculating-corporate-invoicing-tax-budget-1796350270">Andrey_Popov/Shutterstock</a></span>
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<h2>A new check on companies</h2>
<p>In the UK, investigations and <a href="https://www.gov.uk/government/news/cma-recommends-shake-up-of-uk-audit-market">several</a> <a href="https://www.gov.uk/government/publications/the-quality-and-effectiveness-of-audit-independent-review">reviews</a> of the audit profession since the financial crisis have indicated the need for change, but this is happening slowly. </p>
<p>The most recent set of <a href="https://commonslibrary.parliament.uk/research-briefings/cbp-8385/">government proposals</a> has resulted in a package of reforms, but no date yet for an <a href="https://questions-statements.parliament.uk/written-questions/detail/2023-03-28/HL6926">expected draft audit reform bill</a>. Changes include plans to transition the FRC, which currently oversees the audit profession, into a new body called the Audit, Reporting and Governance Authority (<a href="https://www.frc.org.uk/news/july-2022/frc-continues-significant-growth-on-road-to-becomi">Arga</a>) in 2024. This will keep auditing in the private sector, while giving more power to the regulator to act against poor audit quality. </p>
<p>A state auditor would be better. Many governments already have experience of auditing via institutions such as the US General Accounting Office and the <a href="https://www.nao.org.uk/wp-content/uploads/2021/07/Efficiency-in-government.pdf">UK National Audit Office</a>. Staffed by experts, they have institutional separation and state-backed independence and powers, alongside a commitment to public service. </p>
<p>This would be more effective at safeguarding society and the financial system than a private company. Open and transparent rules, systems and processes, as well as close monitoring of risk both between and within industries and organisations, will limit the damage of future failures – in banking and beyond.</p><img src="https://counter.theconversation.com/content/205435/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Atul K. Shah does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Is private sector auditing of large financial institutions fit for purpose?Atul K. Shah, Professor, Accounting and Finance, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1527292021-01-25T17:51:53Z2021-01-25T17:51:53ZFinancial professions must pivot to stave off technological extinction<figure><img src="https://images.theconversation.com/files/380334/original/file-20210124-23-1475qga.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4928%2C3260&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The accounting profession and others in the financial services industry are at risk of extinction due to technological advances. </span> <span class="attribution"><span class="source">(Adeolu Eletu/Unsplash)</span></span></figcaption></figure><p><a href="https://hbr.org/2017/03/how-blockchain-is-changing-finance">Blockchain technology threatens</a> to upend the financial sector. While this presents an opportunity to reduce costs for businesses and consumers alike, it may also make some professions, like accounting, obsolete. </p>
<p>What can financial professionals do to reposition and rebrand themselves in the face of potential extinction?</p>
<p>They’re not the first to be replaced by technology, after all. Over the past two decades, travel agents have been <a href="https://www.expedia.ca/">replaced by sites like Expedia</a> <a href="https://www.priceline.com/?vrid=5dacfeb1b7a72633bf47e0412cbb04ec">and Priceline</a>, while taxi drivers are being supplanted <a href="https://www.uber.com/ca/en/">by Uber</a>. </p>
<p>What’s different here is that accounting and finance are considered <a href="https://doi.org/10.1177%2F0950017015621480">elite professions</a>. These vocations are highly paid and require high levels of education and training, raising questions about how other professions might fare in the face of technological disruption.</p>
<p>How do professions at risk of extinction reassert their value in order to stand a chance at survival?</p>
<h2>What do they do best?</h2>
<p>The first thing professions need to do is reassess their value proposition. What does their profession do better than anyone else? How can this expertise be repackaged in order to appeal to new clients or customers, or develop new service lines?</p>
<p>As an example, accountants have long been aware that technology has the potential to disrupt their profession. Some are suggesting that blockchain <a href="https://www.aicpa.org/content/dam/aicpa/interestareas/frc/assuranceadvisoryservices/downloadabledocuments/blockchain-technology-and-its-potential-impact-on-the-audit-and-assurance-profession.pdf">may replace</a> auditing altogether. However, auditors have been able to successfully repackage their expertise to expand into new areas like <a href="https://www.emerald.com/insight/content/doi/10.1108/AAAJ-03-2013-1252/full/html">awards ceremonies</a>, <a href="https://doi.org/10.1016/j.aos.2008.02.003">business school rankings</a> or even <a href="https://doi.org/10.1111/j.1911-3846.2011.01108.x">sustainability reports</a>. </p>
<p>To do this, the accounting profession had to figure out where its strengths lie and how these might be combined with other forms of expertise to create something new.</p>
<p>One place auditors are doing so is in the area of <a href="https://doi.org/10.1016/S0361-3682(96)00037-2">sustainability assurance</a>, which <a href="https://www.icaew.com/-/media/corporate/files/technical/audit-and-assurance/assurance/sustainability-assurance-your-choice.ashx?la=en">involves auditing</a> a client’s social, economic and environmental performance. This could mean, for instance, assessing and verifying an industrial client’s reported greenhouse gas emissions. </p>
<figure class="align-center ">
<img alt="Four smokestacks against a blue sky." src="https://images.theconversation.com/files/380446/original/file-20210125-21-yplnvd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/380446/original/file-20210125-21-yplnvd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/380446/original/file-20210125-21-yplnvd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/380446/original/file-20210125-21-yplnvd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/380446/original/file-20210125-21-yplnvd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/380446/original/file-20210125-21-yplnvd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/380446/original/file-20210125-21-yplnvd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">One area of promise for accountants is sustainability assurance that involves auditing a company’s sustainability claims. An example is ensuring a business is truly cutting back its greenhouse gas emissions.</span>
<span class="attribution"><span class="source">(Leon Gao/Unsplash)</span></span>
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<p>Some auditors are recognizing that while they don’t possess the scientific know-how to validate the science behind sustainability reports, they are able to engage experts from those areas so that, together, they can create a new business line.</p>
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Read more:
<a href="https://theconversation.com/how-blockchain-can-democratize-green-power-87861">How blockchain can democratize green power</a>
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<p>While accountants have been unable to entirely eliminate the threat of technological extinction, some have been able to revive their position in the market by finding new buyers for their services. </p>
<h2>If you can’t beat ’em, join ’em</h2>
<p>Blockchain technology poses a unique challenge because it was designed to upend the traditional financial order. The cryptocurrency <a href="https://link.springer.com/chapter/10.1007/978-3-030-17740-9_3">Bitcoin is created, distributed, traded and stored with the use of blockchain, essentially a decentralized, peer-to-peer ledger system</a> that is changing the way money is exchanged.</p>
<p>More recently, a new blockchain use called <a href="https://academy.binance.com/en/articles/the-complete-beginners-guide-to-decentralized-finance-defi">decentralized finance</a> (also referred to as “DeFi”) has introduced financial applications that aim to <a href="https://www.coindesk.com/what-is-defi">eliminate traditional financial intermediaries</a> like banks. </p>
<p>Although the probability of banks being replaced by blockchain-based applications is unlikely in the short term, the trend could take hold in the long run. As a result, <a href="https://www.coindesk.com/the-big-banks-riding-bitcoins-bull-run">several banks</a> have developed platforms that allow their clients to trade cryptocurrencies like Bitcoin, Ether or Ripple.</p>
<p>Global financial services company <a href="https://www.jpmorgan.com/solutions/cib/news/digital-coin-payments">J.P. Morgan</a> has developed a digital coin that provides instantaneous payments between institutional clients. The high-profile financial institution’s embrace of blockchain-based products represents an abrupt departure from comments made by the company’s CEO in 2017, when he called Bitcoin <a href="https://money.cnn.com/2017/09/12/investing/jamie-dimon-bitcoin/index.html">a fraud</a>. </p>
<p>This <a href="https://cryptonews.com/news/us-banks-offering-crypto-custody-is-insanely-bullish-and-ris-7205.htm">change in sentiment</a> reflects a broader shift in regulators’ and bankers’ attitudes towards cryptocurrencies — and blockchain, more broadly. </p>
<figure class="align-center ">
<img alt="A sign advertises a Bitcoin ATM." src="https://images.theconversation.com/files/380329/original/file-20210124-15-180x2dz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/380329/original/file-20210124-15-180x2dz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/380329/original/file-20210124-15-180x2dz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/380329/original/file-20210124-15-180x2dz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/380329/original/file-20210124-15-180x2dz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/380329/original/file-20210124-15-180x2dz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/380329/original/file-20210124-15-180x2dz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A sign advertises a Bitcoin ATM in Halifax in February 2020.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Andrew Vaughan</span></span>
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<p>Recognizing that blockchain technology isn’t going away, bankers are instead looking for ways to leverage their status as trusted financial brokers to provide confidence to customers wishing to experiment with cryptocurrencies. Like the accountants expanding into sustainability assurance, bankers are leveraging their strongest advantage — their reputation as trusted intermediaries — to create a new product for the digital age. </p>
<h2>Upskilling needed</h2>
<p>However, the shift to providing services in the blockchain sector requires a high degree of upskilling in the area of information technology. <a href="https://doi.org/10.2308/ISYS-19-007">My research</a> on auditing suggests that many accountants are refraining from taking on clients in the blockchain sector because they feel they lack the technological competence to do so.</p>
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<a href="https://images.theconversation.com/files/380331/original/file-20210124-17-1ae2o5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A person works on their laptop." src="https://images.theconversation.com/files/380331/original/file-20210124-17-1ae2o5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/380331/original/file-20210124-17-1ae2o5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=434&fit=crop&dpr=1 600w, https://images.theconversation.com/files/380331/original/file-20210124-17-1ae2o5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=434&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/380331/original/file-20210124-17-1ae2o5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=434&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/380331/original/file-20210124-17-1ae2o5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=546&fit=crop&dpr=1 754w, https://images.theconversation.com/files/380331/original/file-20210124-17-1ae2o5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=546&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/380331/original/file-20210124-17-1ae2o5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=546&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Some accountants feel unprepared to take on blockchain clients.</span>
<span class="attribution"><span class="source">(Unsplash)</span></span>
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<p>Professional groups like <a href="https://www.cpacanada.ca/en">Chartered Professional Accountants (CPA) Canada</a> (the national organization representing the Canadian accounting profession) have called on the next generation of CPAs to become <a href="https://www.cpacanada.ca/foresight-report/en/index.html#page=1">data masters</a>. This may not be realistic. Becoming data experts while maintaining an accountant’s foundational knowledge in tax, financial reporting and auditing may end up producing a generation of jacks-(and janes)-of-all trades who are masters of none. </p>
<p>The reality is that technological disruption threatens all professions and the prospect of extinction is real. The best way to fight back is to focus on what a profession does best — and get even better at it. </p>
<p>While it may be tempting to try to turn finance professionals into data scientists, this could do more harm than good by detracting from what profession’s key areas of expertise, making it even more likely that a profession will become an endangered species. Instead, financial professionals need to focus on finding new uses for their skills.</p><img src="https://counter.theconversation.com/content/152729/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erica Pimentel receives funding from the Social Science and Humanities Research Council of Canada (SSHRC) and the CPA Québec Foundation. </span></em></p>In the face of technological threats, it may be tempting to turn finance professionals into data scientists. This isn’t the way forward. Instead, they need to find new uses for their expertise.Erica Pimentel, PhD Candidate in Accounting, Concordia Public Scholar, Concordia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/756172017-05-30T11:01:01Z2017-05-30T11:01:01ZTax take shrinks as online accommodation agents rake it in<blockquote>
<p>This is a huge market and no one knows how it all works except the mug operator who washes the linen, cleans the toilets and battles with being recognised by Google to compete with these guys … and pays income tax on every dollar earned.</p>
</blockquote>
<p>Duncan McIntyre is the owner of Mt Martha Villas, a B&B on Victoria’s Mornington Peninsula. Like thousands of hotel and short-stay operators across the nation, McIntyre is alarmed at the growing market power of online travel agents (OTAs). </p>
<p>When the OTA market began around 2000, online accommodation sites were efficient. They dealt with the overhang of inventory – spare rooms, that is – and they matched the travelling public with B&B operators for a small charge. Now, says McIntyre, the market has consolidated and foreign, tax-avoiding multinationals are calling the shots, driving up prices.</p>
<p>Another beachside apartment operator on the New South Wales South Coast – she didn’t want to be named for fear of reprisal – says the OTAs stop her from discounting.</p>
<blockquote>
<p>The fees can be up to 30% per cent (to get premium position on an OTA website) and they don’t allow you to compete (on price) with them.</p>
<p>As a small business, we are beholden to list with these sites as they obviously have power in Google rankings, and we would disappear without such listings.</p>
</blockquote>
<p>Both operators talked about tax. Online accomodation websites are booming yet their billions of dollars in income, income that used to flow to Australian companies and contribute to Australia’s tax base, now almost entirely bypasses these shores.</p>
<h2>Heading for a virtual duopoly</h2>
<p>The two leaders in the accommodation space are Booking.com and Expedia, with more than 18,000 in listings daily. An investigation of their financial statements shows the former books its sales directly to The Netherlands and the latter directly to the US; so no GST and virtually no income tax.</p>
<p>The chief executive of the Accommodation Association of Australia (AAA), Richard Munro, says the gross value of the accommodation bookings market is A$15 billion to A$17 billion. The two top players command roughly one-third, or A$5 billion in gross spending (30% market share of total bookings, or almost <a href="http://www.hmaa.com.au/Portals/34/FINAL%20ACCC%20submissions-%20AAoA.pdf">85% of online bookings</a> in Australia).</p>
<p>Assuming average commission rates to Booking.com and Expedia of 15% of each sale, says Munro, these two players alone rack up annual sales in Australia of more than A$750 million.</p>
<p>Here is the punchline though. This A$750 million or so in sales is nowhere to be seen. Last year, Bookings.com disclosed revenue of just A$16.2 million, according to its skimpy financial statements filed with the corporate regulator, while Expedia booked $$93 million. Almost all revenue in both instances came from offshore parent companies in “service” arrangements.</p>
<p>Over the past three years, Booking.com has paid a mere A$2.46 million in tax in Australia, despite its offshore associates raking in A$1 billion or so in revenue.</p>
<p>Expedia’s financial statements are so lame they don’t disclose tax in the cash-flow statement, nor in the notes – nothing to see there. They have booked a tax expense, but expense is an estimate not a payment.</p>
<h2>A familiar tax-avoidance structure</h2>
<p>All this is now convention, a well-trodden path of accounting and disclosure chicanery pioneered by Google, eBay and Facebook on the advice of the Big Four accounting firms. </p>
<p>These are the hallmarks of the US digital giants: </p>
<ul>
<li><p>zero income made in Australia actually booked in Australia</p></li>
<li><p>ditto GST</p></li>
<li><p>pitiful amounts of tax paid, and then only in recent years</p></li>
<li><p>a skinny board, a triumvirate of directors: typically two offshore and one in Australia with a low profile</p></li>
<li><p>a small CBD head office in an accountancy firm</p></li>
<li><p>market domination.</p></li>
</ul>
<p>As much as tax is a challenge for regulators, there is also a critical antitrust consideration. The two big players in the space have been gobbling up smaller pretenders, consolidating the market, forcing prices up, forcing small hotels, motels and B&Bs to deal with them or be left with little opportunity to access eyeballs on the world’s greatest monopoly, Google.</p>
<p>The Australian Competition and Consumer Commission (ACCC) is believed to be still investigating competition issues. Expedia
has been pouncing on a slew of rivals. It now owns Travelocity, Orbitz, Hotels.com, Wotif, Lastminute, Hotwire, Trivago, CheapTickets and eBookers.</p>
<p>There was outrage last year as <a href="http://www.traveltrends.biz/ttn555-hotelier-outrage-over-accc-rate-parity-agreement-with-booking-com-and-expedia/">hotel operators slammed the ACCC</a> for striking a “secret” deal with the duopoly which stopped hoteliers from offering cheaper prices online.</p>
<h2>What can authorities do about this?</h2>
<p>While the industry brawl over pricing parity rages on, authorities could do some simple things to enhance accountability by these conniving tax avoiders. For one, the Tax Office could force – as it has done with Google and Facebook – the OTAs to bring their revenue onshore to be taxed, instead of letting them <a href="https://www.michaelwest.com.au/sham-how-multinationals-duped-us/">pretend their Australian businesses are really Dutch or American</a>.</p>
<p>These multinationals, like the others, command puppet regimes across the globe. Their real directors, the “shadow directors”, are offshore, so their companies should be treated as such, as undisclosed agencies, and taxed accordingly.</p>
<p>As usual, the accountancy profession is miserably failing to uphold standards, and their multinational clients aren’t compelled to file proper General Purpose financial reports rather than the feeble Special Purpose reports designed to conceal.</p>
<p>Booking.com – auditor Deloitte – lists an address in Martin Place, Sydney. In 2016, it disclosed A$7.1 million in dividends to its Dutch shareholder Booking.com NV. The ultimate shareholder is US giant Priceline Inc.</p>
<p>Besides its one Australian director, Eve Crestani, Booking.com’s directors are a Jupiter Tsui, resident of Singapore, and Johannes Wilhelmus Pieter Maria Trass, resident of Holland.</p>
<p>It’s a similar deal for Expedia, registered address Bird & Bird Martin Place, Sydney. Two US directors, one Australian. </p>
<p>The only mention of tax in the notes to the latest accounts is a small increase in “foreign tax payable” of A$976,000.</p>
<p>In the case of both companies, it seems the costs were bulked up to minimise profit and therefore tax paid. Expedia shows a A$34 million marketing and advertising budget and a jump in “other” expenses from A$2.7 million to A$8.8 million last year.</p>
<p>It was a mistake for the ACCC to have permitted Expedia to have swallowed Australian business Wotif three years ago. </p>
<p>Australian authorities have allowed predatory, secretive overseas businesses to plunder their tax base while penalising thousands of Australian accommodation operators thanks to onerous commissions and diminishing competition from a duopoly.</p>
<hr>
<p><em>This column, co-published by The Conversation with <a href="http://www.michaelwest.com.au/">michaelwest.com.au</a>, is part of the <a href="https://theconversation.com/au/topics/democracy-futures">Democracy Futures</a> series, a <a href="http://sydneydemocracynetwork.org/democracy-futures/">joint global initiative</a> between The Conversation and the <a href="http://sydneydemocracynetwork.org/">Sydney Democracy Network</a>. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.</em></p><img src="https://counter.theconversation.com/content/75617/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Michael West has received funding from GetUp and the Tax Justice Network to analyse the tax affairs of 20 top multinational companies operating in Australia.</span></em></p>Australian authorities have allowed predatory online travel agents to shrink their tax base while penalising Australian accommodation operators thanks to onerous commissions and vanishing competitionMichael West, Adjunct Associate Professor, School of Social and Political Sciences, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/460672015-08-27T07:49:23Z2015-08-27T07:49:23ZMore audit transparency for investors makes a bitter proposal easier to swallow<figure><img src="https://images.theconversation.com/files/91913/original/image-20150814-2563-1791cos.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A little transparency goes a long way.</span> <span class="attribution"><span class="source">Audit glass via www.shutterstock.com</span></span></figcaption></figure><p>When it comes to auditing financial information, under current professional rules, only the name of the auditing firm appears at the bottom of audit reports. </p>
<p>That is about to change.</p>
<p>The Public Company Accounting Oversight Board (PCAOB) has recently issued <a href="http://pcaobus.org/Rules/Rulemaking/Docket029/Release_2015_004.pdf">its latest attempt</a> to require disclosure of the name of the person who oversaw an audit of a comany’s books, making it binding federal law. All US publicly traded companies are required to have an accounting firm audit their financial statements. </p>
<p>Is this a good thing? Maybe, maybe not. Disclosure of the name of the partner in charge of a public company audit is one the biggest changes to auditing standards I have seen in more than 30 years as a certified public accountant. It may not seem like a big deal to those outside my profession, but it should matter a lot to investors, because the PCAOB and others see it as a critical piece of the debate about the usefulness of the financial information investors rely upon when making investment decisions. </p>
<p>And it’s during times of stock market turmoil like we see today or when accounting scandals reach the front pages such as Enron’s that this long-simmering debate gets renewed attention. When a company’s stock price drops, investors get really interested in who is responsible for the financial information they claim to have relied upon when they bought the stock – and who they might sue to recover their losses. </p>
<p>But despite objections from auditors – myself included – it is time to accept the inevitable and enact the plan, because this latest proposal is a more balanced alternative compared with other approaches we’ve seen in recent years. And more importantly, it includes a separate rule that will go a long way toward helping investors assess the quality of a corporate audit – and whether they should put their money elsewhere. </p>
<h2>The PCAOB plan</h2>
<p>The PCAOB believes disclosing the signing partner’s personal identity is critical to protecting the interests of investors – that is, all of us who invest in stocks, bonds and mutual funds directly or through employee benefit plans at work.</p>
<p>The latest proposal seeks to include the name of the actual auditor who prepared the report in a separate form filed with the PCAOB, a new document called Form AP (for audit participants). The contents of this form will be posted to the PCAOB website and will be fully searchable.</p>
<p>This alternative approach put forth by the PCAOB is an improvement over <a href="http://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB%20Release%20No%20%202013-009%20-%20Transparency.pdf">previous proposals</a> that would have required auditors’ names and signatures to be included directly in the report itself. <a href="http://pcaobus.org/Rules/Rulemaking/Pages/Docket029Comments.aspx">Auditors objected</a> to this because of valid concerns of increased risk of being sued by unhappy investors by signing their own names along with their firms’ names, while proponents argued that increased personal liability would improve audit quality. </p>
<p>I disagree with the proponents. Audit partners already fully understand that regulatory censure and litigation under existing rules can ruin their careers.</p>
<h2>Problems with the approach</h2>
<p>The PCAOB says its goals are transparency and increased accountability. However, audits are performed not by one person but by a multi-member engagement team supported by a quality review partner, internal specialists, consulting partners and the entirety of the auditing firm. </p>
<p>Naming the signing partner puts too much focus on one individual and distorts the reality of the audit process. Listing one person’s name when in excess of 50 people have had a hand in preparing the final report creates a target, not transparency.</p>
<p>Auditors are also already acutely aware of their responsibilities. We have more-than-adequate methods in place to maintain accountability, such as inspection processes, enforcement by the Securities and Exchange Commission, peer review, internal firm inspections and private litigation.</p>
<p>Concerns also remain about misinterpretation and misuse of the disclosed partner names. The reasons for restatements or revised opinions are often complicated, and to attribute accountability to one individual is too simplistic and often unfair. The inevitable lists of “bad partners” will not benefit anybody.</p>
<p>Research cited by the PCAOB in <a href="http://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB%20Release%20No%20%202013-009%20-%20Transparency.pdf">previous proposals</a> is of limited value because studies involve primarily private companies located outside of the United States. For example, one study often cited by the PCAOB includes only statutory audits of private companies in Sweden – clearly not representative of public companies and the litigious environment that exists in the United States today. </p>
<p>The limited research in these studies does not appear to indicate any significant impact on audit quality when the partner is named. </p>
<h2>Plan still boasts benefits</h2>
<p>But this new rule does more than just list individual audit partners, and this is where the true benefit to investors lies. </p>
<p>Because the signing auditing firm often engages other firms to perform significant portions of cross-border audits, the new proposal will require that they disclose the names and locations of any other firm that provides at least 5% of the total audit hours for any given report. This includes affiliates and non-affiliates of the primary (signing) firm.</p>
<p>This is good because audit quality differs materially among various countries due, in part, to cultural factors and the prevailing regulatory environment in each. It is important for users of financial statements to understand which public accounting firms are actually performing the audit work and where they are located, because many recent accounting fraud cases in the US have involved poorly supervised foreign firms performing low-quality audits.</p>
<p>If investors are aware that the signing firm in the US is performing only minimal work while a foreign audit firm incurs most of the audit hours, many investors might change their investment decisions because of a reduced level of confidence in the audit report. Improved audit quality from this disclosure is a real possibility, and that’s the change we need.</p>
<p>In spite of some reservations about certain elements, this new proposal should be supported for continuing to seek a reasonable compromise on a contentious topic in the face of significant criticism. Investors and the public will be better off because of it.</p><img src="https://counter.theconversation.com/content/46067/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeffrey L Johanns does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A plan to disclose the names of corporate auditors has its flaws, but it comes with a rule that will help investors determine how well a company is being audited.Jeffrey L Johanns, Lecturer in the McCombs School of Business, The University of Texas at AustinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/419042015-05-18T14:46:35Z2015-05-18T14:46:35ZScandals and regulation lead to an auditing merry-go-round<figure><img src="https://images.theconversation.com/files/81815/original/image-20150515-25417-1ml3h6k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Going round in circles.</span> <span class="attribution"><span class="source">Joseph Kim | shutterstock.com</span></span></figcaption></figure><p>Tesco has <a href="http://www.theguardian.com/business/2015/may/11/tesco-names-deloitte-as-new-auditor-after-accounting-scandal-pwc">parted ways</a> with its auditors of 32 years, PricewaterhouseCoopers (PwC). This decision follows the <a href="https://theconversation.com/trolley-load-of-trouble-in-store-for-tesco-and-its-bean-counters-32008">£263m accounting scandal that engulfed the supermarket last year</a> and it is moving its business to rival accountancy firm Deloitte & Touche. </p>
<p>Regardless of what happened at Tesco, there is a recent trend for companies to rotate auditors on a more regular basis. This has been encouraged by regulators in a bid to ensure the independence and best practice of auditors. But switching to another of the big four accountancy firms may not make a lot of difference.</p>
<h2>The merry-go-round</h2>
<p>Scandals and regulatory pressures have led to a recent merry-go-round of companies switching auditors. As well as Tesco, Barclays Bank recently <a href="http://www.accountancyage.com/aa/news/2332870/barclays-to-end-120-year-audit-relationship-with-pwc">ended its 120-year association with PwC</a>, while <a href="http://www.ft.com/fastft/297713/bat-picks-kmpg-auditor-after-pwc-dispute">British American Tobacco</a> and <a href="http://www.independent.co.uk/news/business/news/hsbc-awards-markets-top-audit-to-pricewaterhousecoopers-8744568.html">HSBC</a> have moved their business to KPMG after 17 years and 22 years with PwC, respectively. </p>
<p><a href="http://www.ft.com/cms/s/0/9f79a346-6377-11e4-8a63-00144feabdc0.html#axzz3a3bj9n3a">Royal Bank of Scotland</a>, meanwhile, ended its 14-year relationship with Deloitte, appointing Ernst & Young instead. These auditor changes are likely to accelerate as many other <a href="http://www.ft.com/cms/s/0/51d56c68-23c8-11e4-be13-00144feabdc0.html#axzz3a3bj9n3a">major companies</a> are putting their audits out to tender. This is welcome.</p>
<p>By <a href="http://www.legislation.gov.uk/ukpga/2006/46/contents">law</a>, company auditors are required to give an independent opinion on a company’s financial statements. In practice, however, auditor independence can be compromised by numerous factors. </p>
<p>A key factor in independence being eroded is when a long-standing relationship leads to fee dependency on the auditor’s side and cosy relationships can develop with company management. This eventually erodes professional scepticism – a key ingredient for an effective audit. </p>
<p>Over the years, numerous <a href="http://visar.csustan.edu/aaba/DirtyBusiness.pdf">scandal-ridden companies</a> received a clean bill of health from their auditors. Critics called for a <a href="http://www.economist.com/node/976011">mandatory rotation</a> of audit firms on the grounds that after a fixed-period auditors would lose the client and thus have little pressure to go along with shady practices. The incoming auditors would look afresh at the corporate financial statements and may be unwilling to support past dubious practices. </p>
<p>Big accountancy firms <a href="http://www.ey.com/publication/vwluassets/ey-the-case-against-auditor-rotation-rules/$file/ey-the-case-against-auditor-rotation-rules.pdf">opposed</a> these changes. But their opposition to reforms was weakened by the 2007-2008 banking crash, which showed that almost all major distressed banks had received a <a href="http://www.parliament.uk/business/committees/committees-a-z/lords-select/economic-affairs-committee/news/big-4-auditors-inquiry-report/">clean bill of health from their auditors</a> and in some cases banks collapsed <a href="http://www.theguardian.com/commentisfree/2008/mar/14/watchingthedetectives">within days</a> of receiving a clean bill of health.</p>
<h2>Lack of competition</h2>
<p>In reality, the market for audit of major companies is dominated by just four firms – PwC, Deloitte, KPMG and Ernst & Young. Between them they audit about 99% of the <a href="https://www.accountancylive.com/ftse-100-auditors-survey-2014">FTSE100</a> and most of the FTSE 250 companies. Successive governments have failed to break up the big four firms to increase competition and supply of auditing services to large companies. As the banking crash raised age-old questions about auditor independence and strengthened calls for auditor rotation, something had to be seen to be done.</p>
<p>The <a href="http://europa.eu/rapid/press-release_STATEMENT-14-104_en.htm">European Union</a> called for listed companies to change their auditors every ten years. Auditor tenure could be extended by another ten years if competitive tenders showed that the incumbent firm is the best option. In response, the UK has not yet amended its legislation. The <a href="http://www.accountancyage.com/aa/news/1932335/frc-steers-auditor-rotation">Financial Reporting Council</a> (FRC), the UK’s auditing regulator, has opposed mandatory auditor rotation but supported <a href="https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Audit-Tenders-Notes-on-best-practice.pdf">tendering of audits</a> every ten years, which may result in change of auditors. </p>
<p>While the tendering and rotation of auditors is well-intentioned, it will not address the shortcomings in audits. With the big four firms holding an oligopoly on the market, they are essentially swapping clients among themselves. Rotation also does not address the processes associated with the production of an audit. </p>
<p>As private sector firms, accounting firms will still be dependent on company directors for their appointment and fees. No member of the audit team can afford to alienate an audit client by being robust and ultimately lose that client. Auditor rotation does not address fee dependency and eliminate the commercial pressures to appease company directors.</p>
<p>The market pressures on auditors to deliver robust audits are weak. The market for auditing is unlike any other in that it is guaranteed by the state. In a normal market, producers of poor goods and services can be driven out of the market, but that does not apply to auditors as the law requires companies and other organisations to purchase an audit. Despite all the shortcomings, accountants have retained their monopoly of the audit market. In markets, producers of poor goods or services can be sued and put out of business, but auditors enjoy considerable <a href="http://www.bailii.org/ew/cases/ewhc/comm/2015/320.html">liability shields</a>.</p>
<p>Auditor rotation – though welcome in principle – cannot address the deep-seated problems of the industry.</p><img src="https://counter.theconversation.com/content/41904/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Prem Sikka is director of the Association for Accountancy and Business Affairs (AABA), a not-for-profit organisation.</span></em></p>Tesco switched its auditors from PwC to Deloitte – will it do anything to prevent future accounting scandals?Prem Sikka, Professor of Accounting, Essex Business School, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/180752013-09-10T19:12:12Z2013-09-10T19:12:12ZMG Rover debacle can’t hide accounting regulation failures<figure><img src="https://images.theconversation.com/files/31113/original/v67rvnv9-1378833352.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">c e e c h</span> </figcaption></figure><figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/31113/original/v67rvnv9-1378833352.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/31113/original/v67rvnv9-1378833352.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/31113/original/v67rvnv9-1378833352.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/31113/original/v67rvnv9-1378833352.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/31113/original/v67rvnv9-1378833352.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/31113/original/v67rvnv9-1378833352.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/31113/original/v67rvnv9-1378833352.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Needs some more tinkering under the hood.</span>
<span class="attribution"><span class="source">antonychammond</span></span>
</figcaption>
</figure>
<p>The UK accountancy watchdog has barked. The Financial Reporting Council (FRC) has fined Deloitte & Touche <a href="http://www.frc.org.uk/News-and-Events/FRC-Press/Press/2013/September/FRC-publishes-Final-Report-of-Disciplinary-Hearing.aspx">£14 million</a> for failures relating to the demise of MG Rover. The <a href="http://www.frc.org.uk/Our-Work/Publications/Professional-Discipline/Tribunal-Report-Deloitte-Touche-and-Mr-Maghsoud-Ei.pdf">report</a> says Deloitte was engaged in huge conflicts of interest as the firm acted both as auditor and advisor to the company and its directors.</p>
<p>The MG Rover debacle began in 2000 when four businessmen (subsequently known as the Phoenix Four) bought the ailing carmaker from BMW for just £10. The purchase was accompanied by a loan of £423 million from BMW and the UK government also provided additional funds. Deloitte acted as auditor of MG Rover and an adviser to the Phoenix Four. The company continued to receive a clean bill of health from auditors. Between 2000 and 2005, the Phoenix Four collected around £42 million in remuneration. With advice from Deloitte some £7.7 million ended up in an <a href="http://www.thesundaytimes.co.uk/sto/business/Companies/article1091072.ece">offshore trust</a> in Guernsey. In 2005, the company collapsed with debts of nearly £1.4 billion. Some 6,000 workers lost their jobs.</p>
<p>Following a public outcry, the Department of Business Innovation and Skills appointed inspectors, one of whom was an accountant, to investigate the debacle. The two volume report (<a href="http://www.berr.gov.uk/files/file52782.pdf">here</a> and <a href="http://www.berr.gov.uk/files/file52783.pdf">here</a> ) cost £16 million and was published in 2009. The report noted that between 2000 and 2005, Deloitte received £30.7m in fees, of which £28.8m related to consultancy, that is, only £1.9 related to audits. </p>
<p>Deloitte was advising the company and its directors and then audited the resulting transactions. Hence the concerns about possible conflicts of interest and the disciplinary tribunal’s conclusion that Deloitte “failed to be sufficiently objective in its work for MG Rover”. Deloitte is found guilty of “misconduct” and the <a href="http://www.frc.org.uk/Our-Work/Publications/Professional-Discipline/Tribunal-Report-Deloitte-Touche-and-Mr-Maghsoud-Ei.pdf">FRC report</a> states: “the acts which amount to misconduct were quite deliberate” and the firm and its lead partner “placed their own interest ahead of that of the public and compromised their own objectivity. This was a flagrant disregard of the professional standards.” </p>
<p>The FRC’s reputation as an accounting watchdog was severely battered by the banking crash. All distressed banks received a <a href="http://www.essex.ac.uk/ebs/research/working_papers/wp_09-04.pdf">clean bill of health</a> from their auditors even though depositors were queuing outside banks to withdraw their cash and governments were bailing out banks. The FRC failed to investigate any of the auditing firms. The MG Rover debacle has given it an opportunity to reinvent itself. The £14 million fine on Deloitte is the highest ever against any accounting firms. But all is not what it seems.</p>
<p>For any regulatory system to be effective regulators need to act swiftly. That has not been the case for the FRC. It <a href="http://www.frc.org.uk/FRC-Documents/FRC/FRC-Progress-Report-MG-Rover-Group-Companies-Act-I.aspx">initially announced</a> its intention to investigate the conduct of Deloitte as auditor and adviser to the MG Rover Group in August 2005. The wheels of the profession grind slowly and then it claimed that will proceed after the inspectors’ reports if finalised, which was published in 2009. It has taken the FRC another four years to do anything. This is hardly a model of swift action.</p>
<p>The £14m fine may be the largest ever, but needs to be seen in perspective. It is less than half of the £30.7m fees collected by Deloitte. So despite failures and “misconduct”, the firm has still made considerable profit. The firm’s <a href="http://www.deloitte.com/assets/Dcom-UnitedKingdom/Local%20Assets/Documents/About%20Deloitte/uk-deloitte-annual-results-2013.pdf">UK revenues</a> are around £2.5 billion; that’s £6.85m a day. The fine amounts of the loss of about two days’ revenue. This is unlikely to make accountancy firm partners quake in their boots. </p>
<p>The fine will fill the coffers of the FRC and will not be used to compensate creditors, employees, or taxpayers who provided social security and other benefits for the redundant workers. </p>
<p>The MG Rover episode does not herald a new dawn in the regulation of auditors. Despite the toxic effects of conflicts of interest and calls from parliamentary committees, the FRC has <a href="http://www.ft.com/cms/s/0/a16fbee8-967a-11df-9caa-00144feab49a.html#axzz2eTUdpIVR">resisted</a> a total ban on auditors acting as consultants for companies. So companies will continue to audit the transactions they themselves have overseen. Some of the darker practices could be flushed out and given public visibility by compulsory <a href="http://www.frc.org.uk/News-and-Events/FRC-Press/Press/2013/August/FRC-responds-to-Competition-Commission-s-Provision.aspx">tendering of audits</a>, but the FRC opposes that too. </p>
<p>For the time being, the MG Rover episode may legitimise the FRC’s regulatory credentials but the fault lines are as big as ever and will not go away.</p><img src="https://counter.theconversation.com/content/18075/count.gif" alt="The Conversation" width="1" height="1" />
The UK accountancy watchdog has barked. The Financial Reporting Council (FRC) has fined Deloitte & Touche £14 million for failures relating to the demise of MG Rover. The report says Deloitte was engaged…Prem Sikka, Professor of Accounting, Essex Business School, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/85232012-08-06T20:37:37Z2012-08-06T20:37:37ZTo be good corporate citizens, banks must improve their sustainability reporting<figure><img src="https://images.theconversation.com/files/13821/original/dbmtchsh-1343968559.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Banks behaving badly: ensuring banks' sustainability reports are accurate and credible will go some way in restoring public confidence.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>“Events over the past couple of years have raised profound questions about the ways in which banks and businesses contribute to society. For both to play their full part, they must restore trust and become better citizens in a publicly demonstrable way.” So writes disgraced Barclay’s CEO Bob Diamond in his opening to the Bank’s most recent <a href="http://reports.barclays.com/cr11/overview.html">‘Corporate Citizenship’ report</a>. A report released several weeks before the LIBOR scandal broke and which carries the hefty weight of <a href="http://reports.barclays.com/cr11/howwereport/assurancestatement.html?cat=m">Ernst & Young’s stamp of assurance</a>.</p>
<p>And therein lies the irony. And the concern. If the reputable E&Y ‘audited’ Barclay’s environment, social and governance (ESG) performance, how could they miss out corruption to the tune of $US360 trillion in interest rate-fixing? </p>
<p>Equally puzzling is how <a href="http://www.hsbc.com/1/2/sustainability/2009-reports/pwc-assurance">PricewaterhouseCoopers could sign off</a> <a href="http://www.hsbc.com/1/2/sustainabilityreport">HSBC’s “Sustainability Report”</a> shortly before the bank was dragged before US Congress for allegations better suited to a renegade playboy than a major financial institution. </p>
<p>It’s hard to believe that some of the world’s best auditors, dogged detectives of misplaced decimal points, didn’t discover <a href="http://www.guardian.co.uk/business/2012/jul/17/hsbc-executive-resigns-senate">money laundering to Mexican drug lords</a> or matey interest-rate fixing. </p>
<p>While the same questions could be asked of the financial report auditors, it is the particular promise of sustainability reports to reveal the values and ethics underpinning corporate decision-making which makes them especially important in these instances. </p>
<p><strong>Corporate uptake of sustainability reporting</strong></p>
<p>Since 2006, the numbers of companies publicly reporting on their ESG performance through ‘sustainability reports’ has grown globally and exponentially. <a href="http://www.globalreporting.org/">The Global Reporting Initiative</a> (GRI), the world’s leading sustainability reporting framework, reports that 95% of the top 250 global companies now produce an annual sustainability report, with more than 70% of those companies having their reports audited by one of the Big Four accounting firms. Ninety-four of the ASX100 produce some form of sustainability disclosure.</p>
<p>It is critical that the information provided in sustainability reports is accurate, reliable and truthful - especially when such information bears the imprimatur of a respectable auditing firm.</p>
<p><strong>Sustainability reports inform decision-making</strong></p>
<p>Financial analysts use these reports to make investment recommendations. Governments read them to inform regulatory decisions. Everyday consumers reference them for information about issues like climate change, fair trade and labour practices concerning products they buy.</p>
<p>Sustainability reports also inform the inclusion of publicly listed firms on market indices, like the <a href="http://www.sustainability-indexes.com/">Dow Jones Sustainability Index</a> (DJSI) or the <a href="http://www.ftse.com/Indices/FTSE4Good_Index_Series/index.jsp">FTSE4GOOD</a>. A tick of approval from these indices signals to investors that all is well within a firm even beyond its financial figures. </p>
<p><strong>Improving auditing to assure report quality</strong></p>
<p>All of the Big Four UK banks feature on the FTSE4GOOD. All are embroiled in the Libor scandal. Even our own <a href="http://www.theage.com.au/business/nab-facing-new-headache-with-british-banks-under-investigation-20120718-22aks.html">DJSI-listed National Australia Bank now faces investigation</a> of its British banking arm. </p>
<p>So how did certain bank’s sustainability reports achieve Shakespearean levels of tragic irony? </p>
<p>Because current sustainability report auditing processes disempower the auditors.</p>
<p>As E&Y’s “assurance statement” for Barclay’s states: “Our responsibility, in accordance with management’s instructions, is to provide a limited assurance engagement. …Any reliance any such third party may place on the Report is entirely at its own risk.”</p>
<p>It is common practice for firms to set the boundaries of information covered in sustainability report audits, and to what level of detail. Report data is provided to auditors by management and, for the most part, must be taken at face value. Current auditing procedures make it exceptionally difficult for auditors to fully deploy their investigative skills. Rarely are they afforded their <a href="http://en.wikipedia.org/wiki/Columbo">Columbo</a> moment when, standing to leave the CEO’s office, they turn and ask, “I’m sorry, Bob, but I just have one more question….” If only.</p>
<p><strong>Don’t lose faith just yet</strong></p>
<p>So should we lose faith in sustainability reporting altogether? </p>
<p>Absolutely not. </p>
<p>Decades of work and the expertise of hundreds have gone into the creation and spread of sustainability reporting frameworks. It is a practice vital to healthily functioning market economies. But it must be improved - and respected.</p>
<p>Improvement begins by empowering the auditors. Only through provision of powers similar to those afforded to financial auditors can auditing firms truly scrutinise corporate ESG behaviours.</p>
<p>Proper training and certification of sustainability report auditors must also occur. Currently, anyone can “assure” a sustainability report. And while efforts are made to assign specialist auditors, it is not always the case that auditors hold the social and environmental measurement knowledge required to uncover sham data. </p>
<p>While improvements are being made in this area, certification - for example, through systems similar to the <a href="http://www.accountability.org/standards/aa1000as/index.html">AccountAbility1000 Assurance Standard</a> - would ensure that ticks of assurance are provided only by qualified professionals.</p>
<p>Sustainability reporting frameworks must be tightened to ensure more robust reporting. Next year, the <a href="https://www.globalreporting.org/reporting/latest-guidelines/g4-developments/Pages/default.aspx">GRI rolls out the fourth</a> (and greatly improved) version of its reporting guidelines. More detailed performance indicators, better instructions and strengthened requirements concerning reporting of management approaches to key sustainability issues are all steps in the right direction.</p>
<p>Better auditing of sustainability reports - and for that matter, financial reports - will not of itself prevent management from concealing what it wants to conceal. But it does help to foster a culture of disclosure and transparency within organisations.</p>
<p>Companies are now beginning to produce “integrated reports” - a holistic company report showing financial figures alongside ESG data - and this practice may result in greater scrutiny of both ESG and financial claims. </p>
<p>Regulation of integrated reporting marks the final (and perhaps most important) step in ensuring that analysts, governments and the public receive clear, accurate and trustworthy information on all aspects of corporate performance. The work of the <a href="http://www.theiirc.org/">International Integrated Reporting Council</a> and <a href="http://www.unepfi.org/fileadmin/events/2012/Rio20/Press_release_Rio_outcome_document.pdf">regulatory initiatives in countries including South Africa and Denmark</a> suggest this will happen. One day.</p>
<p>Until that time, sustainability reports will continue to provide a wealth of corporate information unavailable elsewhere. </p>
<p>But in the now ironic words of Bob Diamond: “Restoring people’s trust may take longer”.</p><img src="https://counter.theconversation.com/content/8523/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sara Bice is a Senior Consultant with the Australian Centre for Corporate Social Responsibility, a private consulting firm. ACCSR has current and past clients in the banking industry. Sara is a Global Reporting Initiative Certified Trainer and assists firms to write sustainability reports. Further information about ACCSR and its current and past clients is available at: <a href="http://www.accsr.com.au">www.accsr.com.au</a></span></em></p>“Events over the past couple of years have raised profound questions about the ways in which banks and businesses contribute to society. For both to play their full part, they must restore trust and become…Sara Bice, Research Fellow, Centre for Public Policy, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.