Accountants fulfill an important function in the market economy. Their task is to ensure that the figures in the company balance sheets are correct. Investors, governments and citizens rely on the profession to “ensure the integrity of financial reporting,” as the International Federation of Accountants demands of itself. The reality, of course, is far too often different. Auditors are also involved in accounting scandals, the Wirecard case and the inglorious role of the auditing agency EY is just the most recent example.
The experts from the four major accounting firms EY, KPMG, PwC and Deloitte (Big Four) not only scrutinize the books of the corporations, they also advise. And the advice is very lucrative, which raises the following question: Do you want to jeopardize profitable consulting mandates at a corporation by examining that client’s balance sheets very rigorously? This conflict of interest has been a political issue for decades, and after the 2008 financial crisis there were already plans to separate the areas of consulting and auditing. But the lobby from the other side was too strong.
Now the EU is trying again. In 2023, the Commission wants to present a legislative proposal to regulate the audit sector more strictly. “Certified accountants should no longer be allowed to offer consulting services for their large audit mandates at listed companies,” demands Sebastian Mack, an expert on European financial markets at the Jacques Delors Center in his study.
The other three test giants hesitate
This proposal comes at a time when auditing firm EY is planning to spin off its advisory business from its auditing business and take it public. You want to eliminate the conflict of interest. The other three test giants hesitate. In general, there is a fear that the auditing business would be deprived of specialist knowledge as a result. Auditing and consulting skills are complementary.
In addition, splitting up the Big Four would not eliminate the risk of a conflict of interest. “A division cannot really solve the problem of partisanship,” says expert Sebastian Mack. “If the shareholders of the operationally separate companies remain the same, they are in practice still one and the same company with a common business interest.” The EY plans go in this direction, with the partners remaining the majority owners. A more reasonable solution is therefore the ban on offering clients in the audit business consulting mandates at the same time.
Overall, according to the study, the strong market dominance of the Big Four and weak public scrutiny undermine the quality of the audit. These deficiencies could also be remedied. “To increase competition and curb the dominant position of the Big Four, joint audits involving at least one non-Big Four firm should be made mandatory,” writes Mack, who himself once worked for an accounting firm.
“In addition, the European Securities and Markets Authority (ESMA) should directly oversee the largest audit firms to ensure effective oversight.” Currently, supervision is still in the hands of the national authorities. This is problematic because they have different resources and structures. “Multinational audit firms should be uniformly supervised at European level.”