KPMG, PwC, E&Y and Deloitte under fire

Updated 22 February 2013

KPMG, PwC, E&Y and Deloitte under fire

LONDON: Companies in Britain could be forced to switch accountants to break up the cosy relationships between the "Big Four" and their clients, blamed for masking weaknesses exposed by the financial crisis.
The "Big Four" — KPMG, PwC, Ernst & Young and Deloitte — check the books of nearly all listed companies in Britain and around the world, and have often served the same clients for decades.
The UK's Competition Commission proposed that companies put out their audit work to tender every five to seven years, and change accounting firms every seven to 14 years — roughly in line with changes being discussed at the European Union level.
Investors would also play a role in selecting an auditor, according to plans put forward by the commission, which published preliminary findings from a probe it began in 2011.
The industry was put under scrutiny after auditor "complacency" was blamed by UK lawmakers for deepening the financial crisis.
The Competition Commission found that 31 percent of the top 100 companies in the UK and a fifth of the next 250 firms had had the same auditor for over 20 years.
Competition in the UK is restricted by factors that make it hard for companies to switch accountants, the Competition Commission found, and there is a tendency for auditors to focus on satisfying management rather than shareholder needs, it said.
The findings add weight to a draft European Union law which contains plans for boosting competition in the 27-country bloc's audit market which would override UK changes.
The US is also mulling auditor rotation as the sector faces questions for giving banks a clean bill of health just before governments had to step in and rescue them in the 2007-09 financial crisis.
Critics have said the Big Four should separate out their audit and advisory units, a step the draft EU law looks at.
"The real issue we have identified is stickiness in the market," Laura Carstensen, who chaired the probe, said. "The question of break-up was not on our list."
There was "significant dissatisfaction" among big investors, the commission said, but changing the "long standing and entrenched" system would take time.
Its proposals go further than a recent change introduced by Britain's Financial Reporting Council (FRC), which requires companies to consider changing accountants every decade. The FRC said it was pleased the Commission was looking at taking more steps to enhance competitiveness and switching.
PIRC, which represents pension funds and fund managers, said mandatory rotation was the best way to ensure auditor independence and large shareholders increasingly favoured this.
The commission also proposes banning "Big Four only" clauses, meaning banks could not insist on a borrower using one of the four top audit firms.
The Big Four insist there is strong competition and point to downward pressure on fees and some recent switchings of auditors among big companies.
PwC said the Competition Commission had "grossly underestimated" the critical role the audit committees at client firms play in protecting shareholder interests.
Ernst & Young said it was pleased the watchdog found no collusion, abuses or excess profits but rejected accusations that the audit market was not serving shareholders, as did Deloitte and KPMG.
"In addition, we believe that competition between audit firms is healthy and robust and that the evidence supports this," E&Y said.
But second tier audit firms, such as Mazars, BDO and Grant Thornton, welcomed the findings after having argued it would not be worthwhile expanding unless there was some intervention to help prise open the market.
"It's clearly going to make a significant contribution in Brussels as the European institutions decide the way forward," said David Herbinet, Mazars' UK head of public interest markets.
The watchdog did not propose curbing the Big Four's advisory services such as tax to clients they audit and also said joint audits, whereby one of the Big Four must share a customer with a smaller accountant, was a non-starter for now.
Joint audits were a top demand from several mid-tier firms and could still be included in the EU law.
The Competition Commission will publish its full report next week and final, binding recommendations by mid-October.
The European Parliament's legal affairs committee is due to vote on the bloc's audit shake-up next month.

Exxon faces setback in Iraq as oil and water mix

Updated 20 April 2018

Exxon faces setback in Iraq as oil and water mix

  • Exxon’s talks with Iraq on water project hit problems
  • Losing the contract could deal a blow to Exxon’s broader Iraqi plans

LONDON: Talks between Exxon Mobil and Iraq on a multibillion-dollar infrastructure contract have reached an impasse, Iraqi officials and two industry sources said, in a potential setback to the oil major’s ambitions to expand in the country.

More than two years of negotiations on awarding the US firm a project to build a water treatment facility and related pipelines needed to boost Iraq’s oil production capacity have hit difficulties because the two sides differ on contract terms and costs, the officials and sources told Reuters.

Unless the differences can be resolved, the project could be awarded to another company in a tender, the officials said, without elaborating on the points of dispute.

Losing the contract could deal a blow to Exxon’s broader Iraqi plans, as it would be handed rights to develop at least two southern oilfields — Nahr Bin Umar and Artawi — as part of the deal.

Exxon declined to comment.

Further delays to the project could also hold back the oil industry in Iraq, OPEC’s second-largest producer; the country needs to inject water into its wells or risk losing pressure and face severe decline rates, especially at its mature oilfields. As freshwater is a scarce resource in Iraq, using treated seawater is one of the best alternatives.

The Common Seawater Supply Project (CSSP), which would supply water to more than six southern oilfields, including Exxon’s existing West Qurna 1 field and BP’s Rumaila, was initially planned to be completed in 2013 but has now been delayed until 2022.

“The CSSP would be expensive and challenging but there’s opportunity here (for Exxon) ... to get access to resources on a very large scale and to achieve something and really make a difference to its own business,” said Ian Thom, principal analyst at consultancy Wood Mackenzie.

Many of the world’s biggest oil companies, such as BP, Total, Royal Dutch Shell and Eni, have operations in Iraq, where a low-return environment and strict contract terms have squeezed returns in recent years.

With total oil production at West Qurna 1 at around 430,000 bpd, Exxon’s presence in Iraq is small compared with dominant player BP whose Rumaila oilfield accounts for around a third of the country’s total production of about 4.4 million bpd.

While the Texas-based firm is looking to grow in Iraq, its geographical focus remains on the Americas, including US shale fields and Brazil, in contrast to rivals such as France’s Total and Italy’s Eni who have been significantly expanding their activities in the Middle East in recent years.

The talks between Iraqi authorities and Exxon are still ongoing, according to the industry sources and officials from the Iraqi oil ministry.

However the state-run Basra Oil Company (BOC), which is overseeing the project, said it could now tender the project this month in a parallel process with the aim of completing a first phase by 2022.

“We have this one approach but we can have another approach as well,” Abdul Mahdi Al-Ameedi, head of the Iraqi oil ministry’s licensing and contracts office, told Reuters.

Iraq chose Exxon to coordinate the initial studies of the CSSP in 2010. At the time, Baghdad aimed to raise its oil production capacity to 12 million barrels per day (bpd) by 2018, rivalling Saudi Arabia. That target has been missed and been cut to 6.5 million bpd by 2022 from around 5 million bpd now.

Negotiations with Exxon fell through in 2012 due to red tape and cost disputes. In 2015, the company re-entered talks with the oil ministry, this time in partnership with China’s CNPC and with the CSSP folded into a much bigger development project known as the Integrated South Project. 

CNPC did not reply to a request for comment.

For Iraq, going down the non-Exxon route raises two major concerns: How to integrate the project between the water treatment facility and the oilfields and how to finance the project, Thom said.

Two Iraqi oil sources told Reuters that taking the non-Exxon path would raise financing concerns for Iraq.

Projected costs of the scheme have not been disclosed, but engineering studies have put the cost of treating 12.5 million bpd of seawater transported to six oilfields at $12 billion.

The capacity has been revised downwards, with the first phase set to have a 5 million bpd of water, and in the second phase an additional 2.5 million bpd of water will be added for additional fields.