Mark Spofforth, partner, Spofforths, and former ICAEW president
Ian Fraser, financial journalist and author of Shredded: The Rise and Fall of RBS
Margaret Thatcher once said: “There is no such thing as society. There are individual men and women, and there are families.” In a similar way, the accountancy profession is a combination of accountants, standard setters, regulators. In any group of individuals there will be a few rotten apples. But the question here is: can the vast majority of those individuals be trusted?
The concept of trust in a society depends on its habits, customs and ethics, according to author Francis Fukuyama – factors that aren’t susceptible to regulation, so regulators can’t create trust. They can reinforce it, although there is little evidence that they yet do that successfully. But the reason chartered accountants are trusted; the reason charities or parish councils or voluntary organisations look to us to contribute to their organisations, is that for generations individual chartered accountants have given them reason to trust the culture that we instil in our members.
Members rise to the top of industry and government not just because they’re intelligent and passed difficult exams, but because they listen, they’re sceptical, they exercise sound judgement and they put the interests of their client and society above their own interests. We’ve built a great, trusted, profession. Long may it last.
Mark Spofforth’s “a few bad apples” argument won’t wash. The problems with accountancy are endemic, institutionalised and self-inflicted. The profession sold out in the wake of “Big Bang,” as they tried to boost revenues by offering additional business services. This was spiffing news for the earnings capacity of partners at Big Four firms but damaging to the wider profession.
Diversification also gave rise to extraordinary conflicts of interest. In a business services supermarket, it became impossible for auditors to fully exercise professional scepticism for fear of alienating a client who might be spending more on non-audit services. So audits were debased and partners sacrificed integrity and the credibility of their profession on an altar of greed. Surely the collapses of Enron and Arthur Andersen would have prompted a rethink? But no. Accountants proceeded to help their financial sector clients to apply similar tax avoidance and structured finance wheezes. In doing so, they played a critical role in stoking up the financial crisis.
Had they questioned the wildly-optimistic valuations placed on bank assets; been more alert to widespread fraud in the financial sector; and had the gumption to challenge bank clients about excessive leverage and concentrations of risk, the crisis may have been averted. But accountants are still in denial. Asked about bank audits by the House of Lords Economic Affairs Committee in November 2010, Big Four bosses insisted their audits were impeccable. It was beyond belief!
Of course, some chartered accountants in smaller firms are perfectly honourable but the values of the big players have percolated down to the mid-tier and beyond. Accountancy has long ceased being a “profession”. It now a just another “trade”. And a pretty untrustworthy one at that.
So the profession is untrustworthy because it failed to see the financial crisis coming? That’s harsh considering how few others did either.
Your claim that auditors lack independence also needs addressing. I agree that the whole idea of being appointed and paid by directors to act on behalf of shareholders is a bit strange, and there is scope for reviewing the powers of shareholders and their responsibilities to make directors accountable. But there is a good reason why companies use audit firms to provide consultancy. And that is, they are best at providing it.
This is as true of SMEs as the FTSE 100. Audit is the best training for management, which is why we have 84 chartered accountants on FTSE 100 boards. An audit-only profession would lower the quality of audits and raise costs. There may be issues in the audit market, such as a lack of sufficient competition and innovation, but that is a far cry from the issue of trust.
Any profession that subverts regulation and oversight to suit its own interests; that bullies government over LLPs; that’s willing to peddle illegal tax shelters to make a fast buck; that is prepared to take audit clients’ money to produce “independent” reports which are actually highly partisan; and which sometimes skews results of administrations to suit the interests of favoured clients is neither trustworthy nor professional.
Regarding the “failure to see the financial crisis coming”: the crisis was not an external event but the systemic insolvency of banks to whose books auditors had privileged access. Auditors either failed to spot that the banks were trading whilst insolvent – in which case they were incompetent and utterly useless; or they colluded with banks to disguise their insolvency – in which case they are corrupt. It can only be one or the other.
The problems with the IAS 39 (the financial instruments standard) were well ventilated before the crisis erupted. But still the profession clung to them. The profession’s conspiracy of silence about these and other errors has compounded the low esteem in which it is held. It was this conspiracy of silence that required the PRA to identify that Co-op Bank, audited by KPMG, was essentially bust, and that RBS was in worse shape than its accounts, signed off by Deloitte, showed. This is no basis on which any profession can be trusted.
I guess it’s my training as an auditor, I don’t know, but I do prefer to base my arguments on facts and evidence, rather than supposition. First, the difference between a “trade” and a “profession” is an interesting one. Sir Henry Benson, former ICAEW president, defined a professional body as one that puts the public interest first, even above the selfish interest of the individual practitioner. I firmly believe that this culture still pervades the profession, despite the wild accusations made by Mr Fraser. If we lose this professionalism, we lose the trust. econd, it is a shame that the Big Four failed to state in clear “Daily Mail” language to the public why the work they did, and the discussions that they held with the Bank of England at the time, did not lead them to shout a clear warning of the critical issues the banks faced. It is a point I made forcibly at the time, which unfortunately went unheeded, and has allowed these sort of inaccurate slurs to continue.
Make no mistake, I am no apologist for the Big Four, they are more than capable of looking after themselves, but I leave it to the select committees and the FRC to decide whether there was more that could or should have been done then. So far, no evidence of wrongdoing has been adduced.
Third – and the part of the last statement that made me laugh out loud – is the suggestion that the profession “bullies the government” over LLPs. That is risible. I would love the profession’s influence to be so great; but we are still just one of many voices trying to guide government. I also deplore the loose use of terminology that allows anyone to say that the profession “peddles illegal tax shelters”. This is the sort of statement I have come to expect in certain Select Committees, but is not accepted by HMRC or tax professionals. I agree that national tax codes have failed to deal with the move to a global digital economy, and the global profession needs to step up and help national treasury departments work together to make sure that the right amount of tax has been paid.
These wide and wild generalisations are the stuff of the bar-room, but none of them seem to stand up to the detailed scrutiny of an auditor.
And my most fervent hope is that the public continues to decide whether it can trust the profession by their interaction with individual members of that profession who continually demonstrate not only that they can be trusted, but that they contribute greatly to society, whether that is by adding their skills to charitable organisations or by providing the checks and balances needed to ensure that big corporates remain accountable to the society in which they exist.
You criticise me over the phrase “peddling illegal tax shelters” but this is exactly what the US authorities fined KPMG $456m for in August 2005. It only escaped indictment thanks to a deferred prosecution agreement and, no doubt, the fear that had KPMG faced criminal prosecution, it would have followed Arthur Andersen into oblivion, reducing the Big Four to the Big Three.
This gave rise to the impression the largest accountancy firms had become too big to fail which, if true, would clearly be deleterious to the quality of their audits and give them little incentive to rediscover their moral compass.
I’m glad you find my contention the larger firms bullied the UK government over LLPs amusing. However it’s well documented that when seeking to limit liabilities arising from their own incompetence, negligence and fraud in 1995-99, accountants sought to persuade the UK government to amend “joint and several liability”. After this failed, Price Waterhouse (now PwC) and Ernst & Young (now EY) spent £1m drafting an LLP bill which they persuaded Jersey to enact. The firms then used the threat of quitting the UK for St Helier as “a cosh with which to threaten” the UK government if it failed to deliver a suitable LLP law.
As for denouncing me for making “wild accusations”, “bar-room generalisations”, “inaccurate slurs”... It makes me wonder if you think you’re losing the argument, Mr Spofforth.
So we return to the original question: Can you trust an accountant, or indeed the profession? It seems to be trusted by potential students, of which there is a surplus. ndividual accountants are trusted by their clients, who keep coming back. The professional bodies are trusted by governments, who turn to them for unbiased advice. The regulators by and large trust the profession, even if they have to criticise firms when standards drop. They nevertheless rely on the professional bodies to deal with non public interest disciplinary cases.
It seems the only people who don’t trust accountants are some other accountants. Or is that just competitive chagrin?
It seems Mr Spofforth is in denial. The large firms refuse to acknowledge the disastrousness of IFRS or of their pre crash bank audits.
They have few qualms about milking distressed businesses for fees and skewing administrations to suit their banking masters. They aid and abet tax evasion. They abuse their oligopoly to wring concessions from governments. They have ridden roughshod over the social contract of 1948, by which they agreed to accept “joint and several” liability in exchange for a monopoly of the external audit market.
Any of these transgressions would, in isolation, be sufficient reason to lose faith in this trade. Taken together, they confirm accountants are not to be trusted.