Stewart Hamilton, Professor Emeritus at the IMD business school in Lausanne, wrote a prescient article about the accountancy profession 22 years ago.
Writing towards the end of a decade that saw "Big Bang" and other deregulatory measures reshape the financial and corporate landscape on both sides of the Atlantic, Hamilton warned that the accountancy profession had embarked on a dangerous course.
In contrast to other professions such as medicine and the law, Hamilton pointed out that the accountancy profession lacked the touchstone of either service or duty to a "higher authority".
Writing in CA Student, published by the Institute of Chartered Accountants of Scotland in December 1988, Hamilton warned that the absence of such a criterion meant the advent of greater competition between firms and other commercial pressures placed accountants at risk of becoming "little more than a skilled financial mechanics." I reproduce the bulk of Hamilton's original piece below:
The past two decades have seen unprecedented change in the nature of the accounting profession in the United Kingdom.
... In the process ... we can see the origins of the pressures that I believe are challenging our right to describe ourselves as a profession.
Most people, if asked to define what constitutes a profession, would refer not only to competence but also to service both to the client and to the community at large. In other words there should be an element of concern for one’s fellow man.
In the long established professions of Law, Medicine, Church and Army there is perhaps an extra ingredient -- service or duty to a higher authority; for the law the duty to the courts; for the army to the sovereign; for medicine to the Hippocratic oath and for the church to the Almighty.
... chartered accountancy lacks this vital ingredient. My concern is that we are in great danger of finding that ultimate authority in the unalloyed pursuit of profit. No one can deny that accounting-related fees have risen dramatically and disproportionately in recent years, fuelled by ever-rising costs, and also perhaps by changed expectations of partners in the major firms as to what constitutes reasonable remuneration.
To that demand for high material rewards, one has to add the relentless competitive urge that has been building up where dog not only eats dog but resorts to dubious practices in getting that dog. More and more services designed to augment fee income, and subsequently profit, are being added on to the traditional mainstream activities, giving rise to serious doubts in the minds of many about the ability chartered accountants to preserve the independence of mind necessary to perform the attest function.
In all probability the European Community will resolve that problem for us by forcing a divide between auditing and other functions. Think how much greater our claim to be a profession would be if we anticipated that step and began to reverse, at least mentally, the drive towards corporate multi-disciplinary service organizations which increasingly makes the accountant little more than a skilled financial mechanic.
[Stewart Hamilton, CA - article first published in CA Magazine's "CA Student" December 1988]
The incipient trends identified by Hamilton in 1988 were left largely unchecked - the European Union didn't step up to the plate and despite the fallout from the Enron scandal and the collapse of Andersen, attempts to bar auditors from consultancy proved shortlived. The green paper of EU commissioner Michel Barnier, the consultation for which started in October 2010, is a step forward, but some see it as a classic case of shutting the stable door after the horse has bolted.
Partly thanks to a flawed post-Cold War philosophical/political regime, in which it was thought deregulation and "market fundamentalism" would lead us to the sunny uplands of sustainable long-term prosperity, the Big Four - PWC, Deloitte, KPMG and Deloitte - were given pretty much free rein to do whatever they wanted.
The big accountancy firms transformed themselves from unlimited liability partnerships that had moral integrity and who saw one of their main roles as being to challenge client managements into multi-tentacled behemoths - so big, so conflicted, so self-interested, so obsessed with growing revenues and profits - that they lost their professional scepticism.
Taking advantage of their political connections and using lobbying skills to the full, they managed to engineer a highly favorable liability regime and a form of 'state guarantee' for themselves, akin to that enjoyed by 'too-big-to-fail' banks.
It has reached the absurd situation where, even in clear cases of criminality by an accountancy firm - as seen in the KPMG US tax shelters case - government(s)' and justice systems' kneejerk response is to let them off the hook. The fear is that if one of the Big Four were to be indicted or found guilty of criminality or even professional negligence, the firm would implode as Andersen did in 2002.
Then we would be down to a Big Three which the governments suspect would be even worse for business and market integrity than the current oligopoly. We have reached the dangerous stage where the Big Four, just like "too big to fail banks", are a danger to capitalism itself.
The astonishing inability to Big Four firms to spot fraud, even when it's staring them in the face, speaks volumes. So does their "ask no questions, tell no lies" approach to the aggressive (= fraudulent?) accounting practices widely used by, and the inflated valuations slapped on illiquid assets by, most of their banking customers worldwide before, during and after the credit bubble.
But those dependent on audits, including regulators and investors, are increasingly recognizing that the current situation cannot continue, that 22 years after Hamilton's warning it's time for something to be done.
The most recent development is that Edinburgh-based fund manager Standard Life Investment is calling for the Big Four to be broken up. In evidence given to an inquiry into the audit sector being conducted by the UK's House of Lords, SLI said the current level of market concentration is:
“fundamentally unhealthy and presents a systemic risk which has the potential to undermine financial stability and the confidence of capital markets”.
This is a brave stance for Standard Life to take and one sceptic has said it'll be interesting to see if Standard Life continues to use Big Four firm PWC as its own auditors. But it's another sign that the Big Four may be drinking in the last chance saloon.
Further reading on some of the issues facing the accountancy profession and audit professions:
- If the FSA wanted a whitewash, PwC was well-placed to deliver it by Ian Fraser [blog]
- Holding the auditors accountable for missing corporate fraud by Ian Fraser [blog]
- Effective Financial Reporting and Auditing: Importance and Limitations by Andrew Higson
- Lehman Bros: The auditor’s dilemma, part 1 by Anthony Harrington [blog]
- FSA challenges audit profession to sharpen up its act by Ian Fraser [blog]
Tags: accountancy , Accounting , auditing , auditor liability , auditors , banking , EU , UK , US