How much concern do we feel for Kevin Ellis? He should sit pretty—senior partner of the UK firm of PwC, which in 2021 clocked up record global revenue of $45 billion. The average profit of his UK partners was a league-leading £868,000, and Ellis himself in 2020 took home a handsome £4.4 million.
Instead, this week’s press attention finds him in a double bind, triggered by the UK’s audit regulator, the Financial Reporting Council. Even in paralysis over its structure and its remit, with the whole topic of “audit reform” on hold as the Boris Johnson government totters for survival between the fiascos of Brexit and COVID, the FRC has seen fit to widen its investigation of PwC’s audits of Babcock International—expanding from 2017 and 2018 to sweep in the last two years before the firm was replaced by Deloitte.
In the usual grim ritual, the firm’s response was the expected if defensive pledge of obeisance and cooperation:
“We will cooperate fully with the FRC in its inquiries,” said PwC in a statement. “Audit quality is of paramount importance, and we remain committed to our ongoing program to enhance audit quality and to the delivery of consistently high-quality audits.
“The FRC’s annual reviews of our audit work, policies, and procedures show a continued trend of improvement in our work, and we use their insights, together with our own reviews, to continuously improve how we deliver high-quality audits.”
Ellis chose at the same time a gratuitous reprise of his frustration as previously aired to the Financial Times:
“(C)riticism of the audit industry from politicians and regulators was harming the profession and risked making it more difficult to attract new recruits.
“Retaining qualified auditors also ‘becomes much harder, if there’s a current of external negativity,’ he said.”
PwC’s prosperity in the COVID era considered, critics would be tempted to charge Ellis with tone-deaf ingratitude, except that his distress lies in the inability of Big Audit to accommodate two conflicting positions: The profession’s leaders self-confidently resist the recognition of atypical but inevitable instances of sub-optimal performance, while the public’s pointed question in any case of significant scandal is, “Where were the auditors?”
Little wonder, there is skepticism about the profession’s legitimacy—among investors and other users, with new graduates exploring their career paths, and as maturing staff decide where to commit their energies and their fortunes.
History teaches that the accounting profession has never rested easily in its relationship with its regulators. In the 1860s, the nascent profession—counting among its leaders both Messrs. Price and Waterhouse—fought off legislative attempts to require that government should audit the UK railroads. Its franchise of privately-provided audits of public companies was only later secured with passage of the core American securities laws of 1933 and 1934.
It’s been downhill since. Indeed, with this month’s fourth anniversary of the collapse of Carillion, Ellis might appreciate the FRC’s pointing its limited artillery at KPMG’s former partner and staff, who have turned on each other under charges of manufacturing and post-dating Carillion working papers and other engagement documentation.
Possible relief for Ellis’s dour pessimism is available, although it would require legislation, cooperation, and deep changes in attitude on the part of all the players—starting with the auditors and including companies, information users, legislators, and regulators.
That is, it is to the profession’s discredit that Big Audit lacks a forum in which audit performance quality can with credibility be investigated, evaluated, and if necessary sanctioned. The available tools are not serving. The FRC—derided in the post-Carillion studies as “a ramshackle house,” and “toothless and passive”—is perceived as non-transparent, inefficient, and ineffective. And the legal systems that continue to threaten “joint and several” liability on the scale that destroyed Arthur Andersen in 2002 are seen as ponderous, erratic, and unpredictable.
To address these issues, a tribunal could be designed for “audit failure study”—drawing on a long and successful history among the other professions. In hospital surgeries and emergency rooms, engineering studies of infrastructure collapse, assembly line disruptions and air and rail accidents, learning emerges in the study of catastrophe, from the inadequate number of lifeboats on the Titanic to the construction deficiencies in the World Trade Center.[1]
The outputs of a well-constructed body—given a broad remit, a legislative mandate, and the necessary expert and staff resources—would:
- Enhance the credibility of corporate issuers’ commitments to quality reporting.
- Support the accountants’ legitimate aspirations and claims of improved performance.
- Provide guidance for standard-setters.
- Offer clarity and transparency to investors and agencies of government.
Resistance would of course be expected. Inertia and preservation of the status quo are never easy to displace. The profession’s leaders and the communities of information issuers and users would all be required as willing participants—endorsing the value of such a tribunal as a matter of mutual trust and appreciation of its value.
As for Kevin Ellis and his concerns, a credible body for the study of his profession’s quality issues would provide a point of reference to which he would steer the interests of his audiences—sparing himself the impossible task of preaching to the unconverted and allowing him to focus on more productive efforts.
[1] For an extended examination of the complexities, challenges, and benefits of “failure study,” please see pages 285-292 of my 2017 book, “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms” (Emerald Books 2d ed.).
[Ed. note: This article was originally published on Re:Balance on Jan. 19. It has been re-published with permission.]
Jim Peterson is a 19-year veteran of Arthur Andersen’s internal legal group. He has been writing about the accounting firms and the Big Audit model since 2002, on his blog, Re:Balance, and in his two books, “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms” (2d ed. 2017) and “DOA: Can Big Audit Survive the UK Regulators?”
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