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January 27, 2023

The Big 4’s Spurious Independence in One Chart

Mark O'Connor of Monadnock Research wrote an epic post over at re:The Auditors yesterday on the Big 4's advisory performance for 2013 and the resulting "conflict metrics." The whole post is worth a read but this chart sums things up well. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No surprise that each firm's advisory and non-audit growth far outpaces their assurance practices'. This growth, of course, raises questions about the possiblity of conflicts of interest for firms who have traditionally relied on their audit services, which requires independence in fact and appearance. 

The firms have flouted their independence for years, but advisory growth in the past three years has brought the issue back to the forefront. Fortunately for the Big 4, the ambiguity of the "appearance" of conflicts of interest continues to save them from outright violation of independence.

O'Connor writes:

The Big Four, without exception, oppose the notion that non-audit services present risk that cannot be effectively mitigated. Those advocating such a perspective claim that limiting the ability of auditors to expand advisory practices is not warranted, primarily because they have effective internal “controls” in place with systems and processes that ensure regulatory compliance. 
 

What a joke. What "controls" mitigate billions of dollars in revenue? What "controls" sanity check the firms' fastest growing revenue stream? What "controls" prevent audit committees from rubber stamping non-audit services? I suppose we just have to accept the firms' word that their "controls" satisfy the "appearance" requirement?  

Sorry, back to O'Connor:

We believe, however, that there are substantive regulatory compliance risks, and other unregulated risks, to stakeholders of public and private entities that must be transparently acknowledged, identified and mitigated.

We look forward to the day when privately-held partnerships with a track record of fighting regulation and disclosure tooth and nail start reflecting on the substance of independence rather than the form. With bated breath. 

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