The £7 billion Carillion collapse has the UK government talking about breaking up the Big Four accounting firms

Carrillion was the UK government's go-to outsourcing partner, a company with a long and disgraceful history of putting profits before people -- perhaps that's why HM Government was so ready to believe in the company's robust financial health as it amassed £7B in debts and then collapsed, spectacularly, leaving the UK in financial and infrastructural disarray.

But if you want to be more charitable to the government, you might put the blame on the giant accounting and auditing firms that gave Carillion a clean bill of health, right up to the last: Pwc, Deloitte, KPMG and EY audit the books for 97% of the UK's 350 biggest firms, and if you can't trust them...?

You can't.

As the big accounting firms have swallowed one another and consolidated the industry into a handful of players, they have become unregulable and thus untrustworthy, which is a problem, because without their oversight, investors, regulators, unions, workers and customers are in no position to judge whether the companies they do business with are on the up-and-up.

Consolidation and monopolization has been sweeping over every industry, thanks to policy choices taken by Margaret Thatcher and Ronald Reagan, 40 years ago. It's a problem when any firm becomes a lazy, corrupt monopolist, but it's especially grave when the firm is a watchdog, meant to keep other firms honest.

There could have been no Enron without Arthur Andersen's complicity; no subprime crisis without AIG selling out. There could have been no Carillion without the Big Four accounting firms.

It appears that even Tories don't like it when the auditors can't be trusted (after all, they represent the shareholder class even more than the managerial class, and while managers might appreciate a morally flexible accountant, shareholders would prefer to know the truth about the companies they're buying into). So, after decades of neglect and self-serving rubbish about the harmlessness of monopolies, the UK government has actually mooted breaking up the Big Four accounting firms, and the firms have taken the threat seriously enough to start drawing up plans.

The committees want the government to refer the accountancy market to the competition regulator to investigate two possibilities. The first is breaking up KPMG, Deloitte, EY and PwC into smaller companies.

The second possibility is that the big four “detach” the audit part of the business which checks companies' books, from consultancy part that offers advice.

The committees say this is needed because there is an inherent conflict of interest in having the two under one roof.

An auditing firm has an incentive to not highlight problems at a firm it is extracting juicy consultancy fees from. Non-audit work now makes up £4 in every £5 of fees for the big four.

Could the big four accountancy firms be broken up and what would happen if they were? [Ben Chapman/The Independent]

(via Naked Capitalism)

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