In a recent article, the Economist argues that PwC, and its Big Four competitors, need to rework the governance of their global networks if they hope to escape the cycle of scandals they have faced in recent years.
Earlier this month, PwC China was fined $62 million and banned for six months by Chinese regulators for having "concealed or even condoned" fraud at collapsed property developer Evergrande. In August, PwC was fined £15 million by the UK Financial Conduct Authority for failing to report concerns about potential fraudulent activity at its audit client, London Capital & Finance (LCF). And, since 2023, PwC Australia has been embroiled in a high-profile scandal in which a partner shared confidential government information to help clients evade tax laws.
However, while PwC's conduct concerns may have received the most press attention of late, its Big Four counterparts have faced similar challenges. In April, for instance, the US Public Company Accounting Oversight Board levied its largest ever fine, $25 million, on KPMG Netherlands for "egregious" and widespread exam cheating from 2017-2022. The regulator also banned KPMG Netherlands' former head of assurance, Marc Hogeboom, from the industry.
It is unclear precisely what is driving the explosion of scandals among the Big Four, the Economist explains. While it may imply that regulators have become more watchful, it also coincides with a period of rapid expansion in the firms' reach and size. "The big four's sheer bigness is something to behold," the article reads. "Together they check the books for nearly all American and European blue chips, as well as offering advice on dealmaking, digitisation and plenty besides. Their collective fees have ballooned from $134bn in 2017 to $203bn last year."
It is possible that this rapid growth is putting a strain on the firms' franchise model, the Economist speculates, whereby their global networks are made up of independent national partnerships. This structure is unlikely to change, the article explains, as many jurisdictions require that audit firms be owned and operated by local citizens. Still, there are immediate changes the Big Four could make.
First, the firms could separate their consulting and audit arms — a move which was contemplated but ultimately abandoned by EY in 2023, the Economist suggests. This would allow audit leaders to focus single-mindedly on audit quality, the article argues, while consultants could focus on developing new capabilities and funding streams. Notably, such a restructuring may also resolve widespread concerns regarding potential conflicts of interest.
The Big Four could also improve their governance and oversight capabilities by bringing outsiders onto their board, the Economist recommends. "That requires regulators to relax rules barring auditors from enlisting independent directors with ties to their clients," the article explains. "Given that the big four serve the world's finest companies, such rules exclude just about any business figure of note. That is no way to run a company—or audit one."
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