European report calls for greater regulation of Big Four auditors

10 July 2017 Consultancy.uk

A survey on global tax avoidance, prompted by the Panama papers scandal in 2016, has called for new measures to hold the auditing practices of Big Four firms Deloitte, EY, KPMG and PwC to account.

A paper commissioned by Members of European Parliament has called for regulators to step up their bid to clamp down on the facilitation of global by the giant big four accountancy practices of the Big Four consultancy firms in the wake of the “Panama papers” scandal. The gang of four, Deloitte, PwC, EY and KPMG, provide auditing services for all bar 10 of the companies in the FTSE 350. The ranking, made up of the world’s largest companies in terms of capitalisation, had global combined sales which totalled some €120 billion last year alone.

The Panama papers were an unprecedented leak of 11.5 million files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca. The records were handed to German newspaper Süddeutsche Zeitung by an anonymous source, which the paper then shared with the International Consortium of Investigative Journalists (ICIJ). The documents revealed a web of secretive offshore tax regimes, which wealthy individuals and companies exploit to avoid paying domestic tax. The papers linked top auditing firms to a number of such businesses, and this most recent report – produced for the European Parliament’s 'Pana committee' and co-penned by Saila Naomi Stausholm and noted anti-tax-avoidance campaigner Professor Richard Murphy of University College London – subsequently calls for new restrictions to be placed on the firms, in order to prevent their huge audit and tax consultancy businesses from engaging in conflicts of interest.

European report calls on greater regulation of Big Four auditors

The authors stated on the release of the paper, “The big four auditing and accounting firms are major players in this ecosystem of tax avoidance, yet they are allowed to operate in secrecy, with no measures in place to deal with obvious conflicts of interest between their provision of both auditing and tax services. They are crucial regulators of the global economic system, with the unique role of both regulating multinationals through their auditing role and simultaneously advising these same companies on how to abuse the legal system, in order to avoid paying taxes. Yet they are subject to minimal public scrutiny and regulation. This situation, and the outcomes it leads to, is entirely unacceptable.”

Beyond the Panama papers scandal, global audit giant PwC is also currently being investigated by UK regulators. The Financial Reporting Council (FRC) announced it had commenced investigating audits by PwC, which the firm had performed on BT's financial statements from 2015 to 2017, correlating in particular to the scandal surrounding the telecommunication giant's Italian division.

Global scandals

BT replaced PwC as its auditor in June 2017 with the fellow Big Four auditing firm KPMG – a firm which was itself the subject of a probe from the UK's Serious Fraud Office and the UK’s accountancy watchdog over its audits of Rolls-Royce’s accounts during a period in which the British engineering company admitted it committed a string of bribery and corruption offences.

The FRC investigation into KPMG’s audits of Rolls-Royce’s financial statements from 2010 to 2013 came shortly after the firm was hit by another scandal in the United States, taking it upon itself to fire six employees, including its head of US audit practice, after they improperly received advance warnings about forthcoming inspections by the separate US accounting watchdog. The UK watchdog also recently fined Deloitte £4m for its audits of Aero and imposed more than £3m in fines and costs on PwC for its audits of subprime lender Cattles.

Big Four - Conflict of interest

All three firms also came under fire for their perceived cashing-in during the liquidation of the Irish Bank Resolution Corporation, with fees amounting to €215 million in the 47 months leading to the end of 2016, which led to an ongoing Commission of Inquiry being established to investigate all post-nationalisation transactions that resulted in any losses over €10 million. While that governmental review last year stated that there was “no stateable case” of negligence against KPMG in particular, the matter is considered “ongoing”. The Capital Markets Authority in Nigeria meanwhile announced it was set to probe EY's audit firm, in relation to their work with the country's troubled Uchumi Supermarkets, after the Nigerian high court dismissed the application filed by EY barring investigation.

All in all in Britain meanwhile, the FRC handed out fines totalling more than £6.5 million to two of the Big Four over 2016 – however the EU study claims that still more needs to be done on a continental and world-wide level to ensure an end to the litany of corruption cases the Big Four have become mired in. In the strongest terms possible the document concluded that the Big Four must acknowledge the “fiction” of their supposedly devolved corporate structures, while being required report more fully and openly on the finances and profits of their international “partnerships”.

The study, dubbed by some as the “Big Four report”, was commissioned by the left-wing Gue/NGL group, was published as MEPs also approved new EU-wide requirements on multinationals with earnings of more than €750 million to report to the tax authorities on a “country-by-country” basis, as increasingly states attempt to move to quell public unrest, while bolstering their own depleted coffers as many nations remain struggling to recover from the international financial crisis which struck a decade ago.

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