Our love for the Big 4!
When it comes to the Big 4, the corporate trust instincts set in for good reasons but is it time to question if such blind reliance is the best practice always?
A newly appointed regional head finds himself in a conflict with one of his country heads and makes it his mission to make him suffer the consequences at all costs! And yes, the pun is intended.
He finds an issue to frame him and gives the job to none other than one of the Big 4 knowing their credibility would go down well with the board members. So, in comes one of the Big 4 beckoned more by an irresistible million-dollar bill than ethics.
The desperate country head lodges a complaint through the whistleblower channel of the Big 4 in question of its blatant role in the "outcome-based factfinding vs a fact-based outcome" assignment. However, it proves futile as the complaint hits a dead end with no further examination of documents/evidence to prove otherwise.
The corporate sector is fraught with similar stories in varied scales echoing "might is right".
A few years back, I observed a finance team of an organisation having a debate with its regional group on the valuation of a sensitive financial transaction between two subsidiaries, where one of the subsidiaries had to act under pressure in lowering the price to minimise the tax impact.
Again, guidance or rather endorsement, was sought from one of the Big 4. When such direction is pursued, it means something is not quite right!
Second opinions were also sought but unanimous support went for the Big 4 in question for the obvious corporate bias they enjoy, if not for the sake of speedy solution. In my experience, I would often get the Big 4 to endorse any matter of discord I had with the board in order to get approval; such is the weight of their branding. I would like to believe that the above two incidences may be an outlier as the Big 4 is known for its quality and capacity to deal with complex matters.
The love for the Big 4 is not limited to multinational corporations only, but is also prevalent among the local corporates in Bangladesh. Corporates prefer to hire the Big 4 as a status symbol despite the exorbitant fees they charge due to its brand value, as opposed to that charged by the local resources that are also qualified with deep rooted local knowledge.
But if you ask them about the execution of the recommendations made by the Big 4, you would be surprised to find the response to be mostly negative or mixed, at best.
Big corporate houses usually have highly qualified professional accounting and financial resources who have sound understanding of their industry and the countries they operate in. It would be wrong to assume that they are incapable of conducting independent/impartial verification or valuation.
However, when it comes to audit, obviously an independent body needs to audit as per the regulatory requirement. Most of the audit firms of the Big 4 extend their services to consultancy, forensic, outsourcing etc.
Let us look at some of the recent headlines: "EY to pay $100 mln to settle US charges of staff cheating on accountant exams" - Reuters.com; Earnest Young, the firm that audits the Ethics of an organisation, admits that its auditors cheat on Ethic exam. "KPMG fined over Rolls-Royce audit" - FT.com; "EY accused of basic failings in $ 2.7bn claim over NMC collapse" - FT.com; "KPMG to be fined Pound 14m for forging documents over Carillion audit" - TheGuardian.com; "Deloitte hit with Pound 2mn fine after rule breaches over Mitie" - Thetimes.co.uk; "PwC fined over exam cheating involving 1,100 of its auditors" -FT.com.
These are merely some examples to stir our blind trust in them!
However, when it comes to audit, opting for the Big 4 is fully justified for ensuring compliance, business/system improvements, independence, credibility, detecting and preventing fraud and so on.
Exceptions aside, they do a very good job too in the majority of cases. And approximately, one third of their revenue comes from this business segment. As for consultancy and others, these firms have a great knowledge base across industries, internationally.
Hence, there is no denying the need and importance of such firms and how irreplaceable they can prove to be, given they follow high ethical standards. Because of such conflicting issues, one of the Big 4 considering to split the company into audit and consultancy operations.
Having said that, if the same firm is given the job of execution of their recommendation, it becomes a different story. Unfortunately, from my three decades of experience in the Bangladesh market, I cannot cite any good experience I had with them on this execution issue.
One of the reasons for this may be that most of their resources are from outside the country who may not have the local knowledge and understanding required for a smooth execution of the recommendation plan.
It is also common that the corporates often misuse the Big 4 for achieving an ulterior motive. Similarly, the Big 4 firms also face a tight spot between revenue and ethics. And cases like the ones cited above mostly occur when revenue outweighs ethics. In all likelihood, the actual number of such cases would be way higher than what gets reported.
If the above examples are carefully examined in developed countries, then the concerned authorities would most likely impose fines, although any fine would be a paltry sum, a slap on the wrist, against their regular exorbitant revenue!
For the "love" of the Big 4 today, both corporates as well as auditors are equally responsible although the onus is more with the auditors for the statutory nature of their role. They may not represent the company but they do represent the investors, shareholders, creditors and stakeholders.
What is important is to bear in mind that while we use the Big 4 to fulfil our own goal, we can be at the hapless receiving end too. To break this loop, it is important that all parties remain strictly professional coupled with effective imposition of regulations by the concerned authorities in Bangladesh.
The author is a telecom and management expert.