When last year multinationals like Starbucks, Google and Amazon came under fire over tax avoidance, the focus naturally turned to the accountancy firms that enabled them to do it. In particular after it was revealed in September that Tesco had over-stated its first-half profits by £250m, the spotlight fell on PricewaterhouseCooper (PwC), Tesco’s auditor for the last 31 years, to explain how it had given the retailer a clean bill of health despite highlighting in its last annual report that recognition of commercial income, where the profit overstatement occurred, was a disturbing area of concern. This is an issue of deception for investors which could be described as corrupt, yet no hint of prosecution of the individual executives concerned has emerged in the ensuing 4 months, though an FCA investigation of the Tesco audit was announced last month, which may or may not yield sufficiently deterrent action.
This lackadaisical attitude to the accountancy firms is worrying for two reasons. One is that they make huge profits, but fail to be penalised when they make significant errors or make public judgments about the reliability of companies which are subsequently found to be wide of the mark. KPMG, the smallest of the Big 4, made £1.9bn profits last year, Ernst & Young made £2.55bn, Deloitte made nearly £2bn, and PwC made £2.8bn – a total for these 4 giant behemoths of nearly £9bn.
More worryingly, because the accountancy profession was historically allowed to self-regulate, it has set the bar so low that auditors virtually cannot fail in the jobs, as they define them. The public’s view is that they’re there to sniff out fraud, but in a formal sense what auditors do is merely opine on whether financial statements meet accounting standards. Without any external rules on what the profession had to verify, accountancy began reducing its own responsibility and instead of offering a ‘guarantee’ that statements were correct, it soon moved to mere ‘opinions’. Now the modern audit doesn’t even provide an opinion on accuracy since the one-page pass-fail report in the US (all 4 CEOs of the Big 4 are American) merely provides ‘reasonable assurance’ that a company’s statements’present fairly in all material respects the financial position of the company in conformity with generally accepted accounting principles (GAAP)’. But GAAP is a 7,700 page tome packed with wide estimate ranges and riddled with loopholes so large that some accountants contend that even Enron complied with them!
Outside the US the International Financial Reporting Standards (IFRS) is used, and that relies more on broad principles. It has the effect that an auditor’s opinion is really saying: “This financial information is more or less OK, in general, so far as we can tell, most of the time”. No wonder the accountancy profession rakes in billions in fees whilst continuing to offer auditor reports that are next to useless and preclude those responsible from being held to account. This is a huge scandal, and either much tighter rules should be drafted which would bring accountancy firmly inside the category of liability or the whole function of auditing should be made into an independent public service.