KPMG, PwC, E&Y and Deloitte under fire

Updated 22 February 2013
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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.


2 years on, Brexit vote has taken a toll on UK economy

Updated 23 June 2018
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2 years on, Brexit vote has taken a toll on UK economy

  • Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals
  • The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum

LONDON: While it’s still unclear what Brexit will look like when it happens next year, the decision to leave has already had a clear effect on the economy: households are poorer, companies are more cautious about investing, and the property market has cooled.
In the two years since the vote to leave the European Union, Britain has gone from being a pace-setter among the world’s big economies to falling into the slow lane. And the uncertainty over what relations with the EU will be when Brexit becomes official on March 29, 2019 could make matters worse.
Prime Minister Theresa May’s Conservative government remains split on what those relations should be. There are those who favor a “hard Brexit,” a clean break that takes Britain out of the bloc’s free trade union but also gives it more freedom to strike new trade deals around the world. Others want to keep Britain as close as possible to the EU, Britain’s biggest trading partner, which could mean it has to obey more of the bloc’s rules.
Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals.
“Thousands of skilled, well-paid jobs are now on the line because of the shambolic mess the government have created over the Brexit negotiations,” said Darren Jones, the lawmaker for the community where Airbus has its plant.
Before the referendum of June 2016, the British economy had been one of the fastest-growing industrial economies for years. Now, it’s barely growing. In the first quarter of this year it expanded by just 0.1 percent from the previous three-month period, its slowest rate in about five years.
For most people, the first and most noticeable impact was the drop in the pound. The currency slid 15 percent after the vote in June 2016 to a post-1985 low of $1.21. That boosted prices by making imports and energy more expensive for consumers and companies — the rate of inflation hit a high of 3 percent late last year.
The weaker pound helped some companies: exporters and multinationals that do not sell mainly in the UK But it hurt consumer spending and businesses that depend on their shopping. The retail industry was hit hard, with high-profile companies like Toys R Us and Maplin going bust, and supermarket chain Marks and Spencer planning deep cuts.
While prices rose, wages lagged, even though unemployment is at its lowest since 1975, at 4.2 percent.
“After Brexit, prices definitely went up,” said Nagesh Balusu, manager of the Salt Whisky Bar and Dining Room in London. “We struggled a bit earlier this year, so now we’ve increased the prices.” The bar is next to Hyde Park, a popular destination for foreign visitors. “The tourists have a good exchange rate. They know they can spend a little bit more than they usually do. But the locals are coming a little less. They are starting to think about how much they spend.”
The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum.
The real estate market, meanwhile, has cooled considerably, with the number of property sales in London near a historic low last year, according to estate agent Foxtons.
While some foreign prospective buyers were attracted by the drop in the pound, others seem to have been scared off by uncertainty over what Brexit might mean for their investment.
House prices are stagnating after years of gains, also due to expectations that the Bank of England will keep gradually increasing interest rates.
Nic Budden, Foxton’s CEO, predicts that the real estate market will remain challenging this year, while Samuel Tombs, analyst at Pantheon Economics, predicts that house prices will flatline for the next 6 months.
Against the backdrop of uncertainty, businesses have become more reluctant to invest in big projects. Because Brexit could lead to tariffs on EU imports of British goods, companies are hesitant to spend big on British plants and office space before they know what the new rules will be.
Benoit Rochet, the deputy chief of the port of Calais, the French town across the Channel from Britain, complained to a parliamentary committee this month that “we know there is Brexit but we don’t know exactly what Brexit means.”
“You are not alone,” responded the Conservative chair of the committee, Nicky Morgan.