This time last year the Financial Reporting Council tried to read the riot act to the auditing industry. Standards, which were already too low, had fallen, the regulator’s inspectors reported. The Big Four firms were told to “act swiftly to reverse the decline”. KMPG (famous audit: Carillion) was the worst of the bunch and was put in the equivalent of special measures.
After such public shaming, and with the Competition and Markets Authority on the prowl, you would expect the well-paid partners at all the professional firms to put their houses in order, right?
Wrong. The FRC’s latest report has landed and it describes more of the same. One in four audits across the industry was below standard, so performance was not even close to the watchdog’s acceptability target of 90%. None of the firms reached that par score. PwC (famous audit: BHS) has replaced KMPG as the laggard within the Big Four with only 65% of its audits deemed acceptable. PwC scored 90% as recently as two years ago.
The news is worse for anyone who fondly believes salvation lies in empowering the next tier of auditors to disrupt the comfortable lives of the big firms. The worst performer was Grant Thornton (famous audit: Patisserie Valerie) where four out of eight inspected audits were not up to scratch, which goes some way to explaining why the firm itself has volunteered not to pitch for auditing work at FTSE 350 companies. Grant Thornton’s quality was “unacceptable” and “a matter of deep concern,” said the FRC.
Naturally everyone can display an action plan showing how more money will be invested in technology, people and training. Year after year, though, the FRC’s study points to the same deep cultural failure: auditors’ inability to deploy professional scepticism and to challenge management’s assumptions.
Familiarity, the regulator suggests, is a factor. An auditor can come to see the company, rather than the investors, as “the client”. Until this mindset shifts, it’s questionable whether any level of investment will move the dial meaningfully.
The CMA’s proposed remedy is an “operational split” between professional firms’ audit and consulting divisions. The two halves would have separate management teams, accounts and bonus pools. The policy would represent a start. Yet this situation surely also demands fines that actually hurt.
In especially gruesome cases, the FRC can stir itself to impose penalties of £10m on auditors. Such a sum may sound chunky but it barely counts as small change in this industry. PwC’s profits in the UK last year were £935m, which allowed the 915 partners to earn an average of £712,000 each, an increase of 9% on the year. The numbers are similar at other big firms.
It is a point to remember as the auditors tweak and update their statements of good intentions. Nobody’s livelihood properly depends on ensuring self-improvement happens.
Sky-high optimism at Virgin Galactic?
Sir Richard Branson reckons $1bn of capital has been ploughed into Virgin Galactic since 2004, so valuing the space tourism venture at $1.5bn – as implied by the public listing – is not a case of exploring new frontiers. In the broadly-defined “tech” sector, you can find wilder valuations.
All the same, there’s an overdose of optimism in the assertion that Virgin Galactic will generate revenues of $600m and top-line operating profits of $270m in 2023. Where are all these customers supposedly willing to pay $250,000 for a 90-minute flight?
A few celebrities have put down deposits but the business will require 2,400 full-price customers to sell $600m-worth of tickets. And it will need to achieve those sales every year to justify the valuation, which could be the biggest problem since repeat custom may be thin. And it’s all supposed to happen within four years.
As an investment, Ryanair looks the better bet.
GDPR has become a nice little earner
Here comes the Information Commissioner’s Office (ICO), causing terror again. On Monday, it whacked British Airways with a proposed £183m fine for data breaches. Now it’s the turn of hotel chain Marriott International to take a £99m hit for data offences at its Starwood business. So the ICO’s tally this week has reached a quarter of billion quid and it’s not even Friday.
The penalties have to withstand inevitable legal challenges, it should be said. But one assumes the ICO has done its homework and understands the General Data Protection Regulation (GDPR) rules better than the miscreant companies. If so, this is becoming a nice little earner for the Treasury.
