Accounting industry fact of the day

The erosion of values and institutional relationships that underpin capitalism has been a constant theme of this blog. The cozy and entrenched relationship between big businesses and and their auditors is another example. 

Sample this,

All but three of the US’s 500 largest companies use the Big Four accounting firms — Deloitte, PwC, KPMG and EY — and many of them have used the same one for decades. According to data compiled by MSCI, 42 of the big US companies that disclose auditor tenure have hired the same firm for more than 10 years, with an average of 24 years on the job. The UK’s 300 biggest companies are similar — 44 per cent of auditors have been on the job for more than 10 years, with an average tenure of 17 years. Most companies like dealing with the same auditor year after year — fewer things have to be explained, and audits can be completed faster. But critics say these long-lasting relationships can become too cosy and lead auditors to lose their scepticism. They point to UK telecoms group BT, which endured two accounting scandals in nine years while using PwC, whose work is now being probed by the UK accounting watchdog (PwC says it is co-operating, and BT has now changed auditors after 33 years). US lawmakers, meanwhile, have asked for an investigation of KPMG’s work for Wells Fargo during that bank’s fake accounts scandal. KPMG, which has had the account since 1931, has defended its work.

In recent months, the US, UK, and EU have taken some tentative steps to usher in greater transparency into auditing. They include bidding out audit contracts after ten years, changing auditors after 20 years, disclosing auditor tenures, and outlining "critical audit matters" and their resolution. 

Maybe there are compelling reasons, but I struggle to understand why auditors should not be procured by bidding every three years. It is more likely a case of captured regulators choosing the convenience of corporate interests over the concerns of conflicts of interests.

Update 1 (24.09.2021)

Auditing industry fact of the day from India

Bulk of the large listed companies in India prefer the network firms of the big four professional services firms—Deloitte, KPMG, PwC and EY—for statutory audit from among the more than 2,300 statutory auditors in the country, official data showed, indicating their apparent concentration in the premium segment of the audit market. On the other hand, close to 70% of all the statutory auditors in the country contend with just one audit client, as per data available from audit regulator National Financial Reporting Authority (NFRA). The network firms of the big four audited 522 companies in FY19 representing 75% of the market capitalisation of the 5,023 listed companies for which data is readily available, NFRA data showed. This represents about 10% of the listed companies by number. On the other hand, 1,578 auditors audit only one company each accounting for a small fraction of the listed companies.

And this on the. rules, 

Under the Companies Act, listed companies, public companies with paid up capital of ₹10 crore and above, private limited companies with paid up capital ₹20 crore and above and all companies with ₹50 crore and above borrowings from public institutions irrespective of their paid-up capital have to mandatorily rotate individual auditors after five years and audit firms after ten years. The cooling off period between two assignments is five years.