When Arthur Andersen founded the accountancy firm which bore his name in 1913, he quickly gained a reputation for honesty. He believed that accountants were beholden to investors as opposed to their clients' management. Indeed, he believed it to the extent that he reputedly once told a railway executive who threatened to go to a rival if Andersen didn’t sign off on flawed accounts that there was ‘not enough money in the city of Chicago’ to make him do it.
It was this honesty that helped establish the firm as one of the so-called ‘Big 5’, alongside KPMG, PricewaterhouseCoopers, Deloitte, and EY. However, the accounting profession changed dramatically towards the end of the 20th century. Accountancy firms increasingly diversified into consultancy and non-audit services, creating an environment in which the appearance of conflicts of interest, whether or not they actually are or not is widespread. They have left themselves open to accusations that they are so beholden to their financial sector clients for consultancy money that they cannot afford to criticize them in an audit - no matter how many tax avoidance schemes and other structured finance wheezes they may encounter.
Such detractors do, unfortunately, have a weight of evidence to back up their claims. In 2002 - 55 years after his death - the accounting giant that Arthur Andersen had built so judiciously voluntarily surrendered its licenses to practice as Certified Public Accountants in the US as a result of its role in the Enron Scandal - one of the largest, and arguably the most notorious, incidences of accounting fraud in history. The Big 4 that was left have not been short the occasional scandal either. Just last year, EY was fined $9.3 million for failures including an auditor’s romantic involvement with a client. In August 2005, KPMG was hit with a $456 million charge by the US authorities after admitting to its part in a fraud that generated at least $11 billion dollars in phoney tax losses. According to Ian Fraser, financial journalist and ‘author of Shredded: The Rise and Fall of RBS’, ‘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.’ PwC and Deloitte have been the subject millions in fines in recent years.
In spite of these scandals, and the significant damage they caused, it appears that people still largely trust accountants. In a recent survey by the Association of Chartered Certified Accountants, the International Federation of Accountants, and Chartered Accountants Australia and New Zealand, 57% said they either trust or highly trust professional accountants when it comes to the tax system, compared to 49% who trust tax attorneys and 35% who trust non-governmental organizations. Less than a third of respondents said they trust politicians. In addition, 58% of the people polled in G20 countries said they believe the work of professional accountants is contributing to more efficient tax systems, 56% that it’s contributing to more effective tax systems, and 49% that it’s contributing to fairer tax systems.
Accountants have been named as the most trusted of professions in a number of surveys over the years, although they more often place somewhere around mid-table. They are usually less trusted than nurses and doctors but well above politicians, bankers, and real estate agents. You could argue that being trusted more than politicians and real estate agents is not exactly a great achievement, like being named the best-behaved mass murderer on death row, but considering the bad press that resulted from the scandals, it is somewhat reassuring that they have not been hit with the same lack of trust that financial services organizations and politicians have had to deal with after the 2008 financial crisis. Commentators such as Peter Lewis, writing on ABC, have gone so far as to say that, ‘They make their living cooking up new ways to minimize tax by punching holes in the rules so successfully that our economy bleeds billions of dollars a year. Chart the economic challenges besetting Australia - from the property bubble to the budget deficit - and there's a direct line to the work of accountants. Yet when we line up the professions and ask the public their levels of trust, accountants rate only behind doctors (who save lives) and engineers (who build things that don't fall down).’ Ian Fraser has been equally scathing in his condemnation, arguing that, ‘The problems with accountancy are endemic, institutionalized 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.’ Yet such criticisms don’t appear to be landing.
This could be because accountants’ reputations rely on the actions of their clients and employers and their crimes are usually viewed as either secondary or accidental - they are victims of the same fraud their client perpetrated on the public. Writing on the Accountant, Alex Malley said, ‘People expect us to not simply do what is right but to ensure that our clients and employers also do what is right.’ Which is surely the entire point of an audit, Malley seems to be suggesting that for people to expect them to ensure their clients do what’s right is somehow unreasonable, despite it being their job. Malley continues, ‘In cases of corporate misbehaviour for example many do not just attribute responsibility to the entity and its management but to our profession as well.’
Other defenses are more robust, particularly that their consultation services are only popular because of their auditing services, and for them to fail in those would threaten their non-auditing services. Ian Powell, UK chairman at PwC, says: ‘Audit is right at the heart of our business and our brand and will remain so. The integrity and trust generated from a successful audit practice enhances our audit brand in respect of all the other services we provide.’ Simon Collins, UK chairman of KPMG, further argues that, ‘Conflicts of interest only exist if you combine a failure of regulation, failure of governance and low personal integrity,’ and that it is ‘absurd’ to believe auditors would compromise their audit judgment to win new business. ‘I would trade any advisory relationship to save us from doing a bad audit,’ he says, ‘our life hangs by the thread of whether we do a good quality audit or not.’
Whether or not accountancy just has a few rotten apples or is systemically broken is something that accountancy firms are going to need to really look at in the coming years. The noise around scandals is becoming and the clamor for competition to the big 4 is growing. If the surveys are anything to go by, they still hold public trust, and they need to. Accountancy, more than almost any other profession, relies on trust, expertise, and responsibility. Mark Spofforth, partner at Spofforths and former ICAEW president, notes that, ‘Chartered accountants are trusted; the reason charities or parish councils or voluntary organizations look to us to contribute to their organizations, is that for generations individual chartered accountants have given them reason to trust the culture that we instill in our members… Our ability to keep our promises has and is going to continue to define the trust society places in us. Without that trust we cannot sustain our professional status. Trust cannot be built on some mystical quality we have. It is built on our collective and individual actions, which are continually broadcast to society.’ With technologies like Blockchain promising a new era of transparency in auditing, accountants face an unprecedented period of disruption, and it may be that they have to look more seriously at systemic failures if they are going to retain their position in the market. If one of the Big 4 fails, it would likely have a knock-on effect throughout the entire economy that could be devastating.