Big 4 on The Proposed Audit Changes

I have been covering the World Economic Forum since 2004 but this is probably the first year that I have spoken to all 4 of the Big 4 and there is one reason- I wanted to know how they are responding to the several proposals across the world- namely by the PCAOB and the European Commission- on mandatory audit firm rotation and restrictions on providing non-audit services to audit clients. Well here are the Big 4 - all reacting to the regulators proposals to cut them down to size. 

Doshi: The new regulatory proposals that audit firms across the world are facing- the key proposal being audit rotation and there seem to be two drivers to that - both the attempt to try and raise audit quality in the face of all the financial collapse etc that we have seen in the last few years and equally I think in Europe the concern has been the dominance of the Big 4. How do you react to these proposals and how effective do you think they are going to be to be able to meet both these key concerns?

Michael Andrew, Chairman, KPMG International

"I think you got to start by asking why is this debate happening and I think people have lost confidence in capital markets. Doesn't matter- whether its rating agencies, regulators, investment banks or auditors- we all have a role to play and say look, lets sit back and see what happened in recent years and how can we actually improve the outcome  of this. We don't think though that the proposals in Europe actually address the issue. What is that the investors need assurance on and things like rotation or separating audit firms actually will potentially diminish audit quality; not actually improve quality. We would much prefer that there be discussion about what is the critical information that markets need to give more confidence in the underlying financial information provided to you. Good examples would be, most investors rely upon analyst statements that are put out in the market place and these are not audited." 

Jim Turley, Chairman & CEO, EY

"We actually don't see mandatory firm rotation as being something that will benefit audit quality, benefit financial quality or benefit some of the many things that haven't been working well. So, as a profession we are not in favor of mandatory firm rotation. Most of the commentary that has come to both the EU and PCAOB in United States has not been in favor of it on multiple fronts because it takes some governance away from independent audit committees and doesn't empower them to do their jobs." 

Dennis Nally, Chairman, PwC International

"I think there is history that we saw where countries have gone down the path of having mandatory firm rotation- they have not enhanced audit quality, they have not enhanced the quality of financial reporting in terms of those capital markets. I am talking specifically about markets like Brazil, I am talking about markets like Korea, countries that have actually had real experience dealing with mandatory firm rotation. So, when we are talking about these issues, we have got to look at those through a lens of what are the facts and why do you think that is a solution that will deal with this particular problem. So, we encourage that kind of discussion and debate. We think there are a lot of other issues that ought to be put on the table as well that can actually enhance audit quality or that can enhance the relevance and sustainability of the profession and that's why we welcome the conversation. I think its short sighted and sometimes simplistic, may be too simplistic to jump to some of these solutions." 

Barry Salzberg, Global CEO, Deloitte Touche Tohmatsu

"I think that that the empirical data which shows that there is not a co-relation between those countries that have had mandatory rotation and improvement in audit quality and in fact you might even see the data to the contrary that would suggest that those countries in which there wasn't mandatory rotation, you might conclude that through evidence of restatements and litigation and so forth that perhaps audit quality has increased. So, I think there needs to be a proper assessment of what actually the impact in those countries that have mandatory rotation has been and in those countries that have mandatory rotation and eliminated it because they concluded that it didn't enhance audit quality. 

Doshi: What about the proposal to disallow audit firms from providing non-audit services to their clients? 

Jim Turley, Chairman & CEO, EY

"We see that it's important to have audit committees have very strong authority over what services an audit provider delivers to its client. Some services should be banned by regulation. We would like to see those services consistently treated across the globe so that if information technology consultant services are banned in one part of the world; they have got to be banned in other parts. But a wide array of services around tax, around due diligence, around transactions, around internal control effectiveness- these are things that actually benefit the quality of an audit. The more you know about the company you are auditing, the better the quality. So, we think that having the right array of services with the right pre-approval by audit committees is the way to go. 

Dennis Nally, Chairman, PwC International

"I think the whole issue of restriction of services that can be provided to a client- all designed to deal with the perceptions of what really caused the crisis and should there be changes made to the auditing profession to deal with those issues going forward. At PwC we welcome that debate. We would say making sure that we understand what those issues are, making sure that we are responsive to try to deal with those issues going forward. We encourage the debate, we welcome it and as you might have imagined, PwC is actively involved in that discussion." 

Michael Andrew, Chairman, KPMG International

"It's a quality issue. At the end of the day, you have a strong brand. You actually look at where the problem has actually occurred in a couple of markets and it's not really a Big 4 problem. It's generally when people go away from the Big 4 or the Big 6 that actually these things occur. So, for example recently you have seen the problems with Chinese IPOs in the US. Most of those have been done by local Chinese firms. There are very few associated with the Big 4 firms."

Doshi: One of the reasons why the EU seems to be proposing this is, in a sense, to break the dominance of the Big 4. Do, you think that this will go some way in doing that, if that was to happen at all? 

Dennis Nally, Chairman, PwC International

"I think it's a really interesting question. At PwC we welcome competition. I think there is an immense amount of competition today. I think there is a legitimate business reason why there are today 4 major international accounting firms- all designed to give you scale, all designed to give you the ability to invest. For example, at PwC this past year, we rolled out a new audit methodology, the cost of which was USD 300 million across our network. It takes a large firm to be able to make those kind of investments to serve the global capital markets. Sure, there is a lot of interesting discussion that is out there designed to may be generate more competition, to encourage local firms to really expand their businesses internationally and as I said, we welcome that.  

Michael Andrew, Chairman, KPMG International

"I think what people really miss is to actually sustain a global network is a huge cost. We spend USD 600 million a year basically making sure that we are investing in audit quality, in new technology, opening new market places, this requires a very substantial global balance sheet, to be able to really instill consistent quality across the globe. As organizations become much more global, they need to be able to have the same audit quality in 140 countries which we operate in and it's very hard for small audit firms to actually be able to make that type of investment. 

Barry Salzberg, Global CEO, Deloitte Touche Tohmatsu

"With respect to concentration, one example would be to encourage the infusion of capital into mid tier firms and perhaps find ways to encourage mid tier firms to combine to gain greater strength." 

Jim Turley, Chairman & CEO, EY

"We look at it more from a policy perspective than from a commercial perspective and so I am confident that Ernst & Young will continue to grow and gain market share under whatever rules, but I think that the issue of concentration which gets a lot of discussion in some parts of the world, especially Europe, gets very little discussion across the America or in the emerging economies." 

Doshi: If despite all the negative feedback that's come into these proposals and all the debates that are going on across the world- these do become rule or law and mandatory, how will it change the revenue model of the Big 4? 

Barry Salzberg, Global CEO, Deloitte Touche Tohmatsu

"Each of the Big 4 would have a different consequence based upon its own market segmentation, its own functionality in terms of what businesses they have and what clients they serve and in which geographies they serve in. It would also depend on which provisions are actually legislated, but I think what it will do is, it will cause you to take a couple of steps back and make sure as we did at Deloitte when Sarbanes Oxley was implemented to find a way to navigate through that environment." 

Michael Andrew, Chairman, KPMG International

"I think it will change the revenue model. There are number of these polices we actually support to improve audit quality  and in terms of audit services, there have clearly been some excesses  in certain situations where I can say that public would lose confidence in that sort of position. So, I think to get some clarity though is important to amend the rules. For example, in United States, we have a very clear set of rules for companies as to what we can and can't do. Those rules are applied and have worked successfully for 10 years- so why can't we have a global standard around this. It will change our business model in certain circumstances and it will actually introduce some possibilities for us in certain markets and some loss of business in other markets and it might well see the introduction of other firms or other legal firms in some of the areas where traditionally we have been very strong." 

Dennis Nally, Chairman, PwC International

"I am highly suspect of that, there is a reason why we went from 8 major international firms to 4- all designed to give you scale, critical mass. At PwC, we have 172,000 people around the world, we operate around 160 countries and that's what it takes to serve these global capital markets."