'Big Four' unlikely to be broken up here amid UK scrutiny of auditing

Singapore

BRITISH lawmakers are calling for drastic change in the world of accountancy - but their concerns over competition may not have caught on here.

Industry stakeholders told The Business Times that the Republic is unlikely to see a mandated break-up of the Big Four giants, as a group in Westminster has suggested.

The Competition and Consumer Commission of Singapore said, in response to BT queries, that the regulator is not looking into consulting and audit services right now.

Lee Fook Chiew, chief executive of the Institute of Singapore Chartered Accountants (Isca), said: "Competition is good for the market . . . However, an overly competitive market may also have the adverse effect of leading to detrimental price wars at the expense of high-quality services."

A key source of concern is major firms' diversification into corporate advisory services - which are much more lucrative, but which some fear could lead to conflicts of interest amid the need to retain audit clients.

The Wall Street Journal reported in April that the four firms' combined consulting and advisory revenue worldwide now outstrips turnover from their traditional auditing work - and has grown by 44 per cent since 2012, far outpacing the 3 per cent uptick in auditing-related revenue.

The term "Big Four" refers to Deloitte, Ernst & Young (EY), KPMG and PricewaterhouseCoopers (PwC).

A fifth, Arthur Andersen, fell from grace in 2001 for signing off on fraud-riddled Enron's books.

The Big Four have come under fresh scrutiny in the wake of debt-ridden British construction giant Carillion's collapse in January.

In Westminster, the parliamentary Work and Pensions Committee noted that Deloitte served as the company's internal auditors and KPMG as its external auditors, while EY was hired to review Carillion's finances.

With PwC "the least conflicted of the Four", said the committee, "the oligopoly had become a monopoly and PwC could name its price".

A committee report on May 16 asserted that "the lack of meaningful competition creates conflicts of interest at every turn". It recommended that Whitehall refer the statutory audit market to a national competition watchdog, as the committee wrote: "The terms of reference of that review should explicitly include consideration of both breaking up the Big Four into more audit firms, and detaching audit arms from those providing other professional services."

While the Big Four brand name commands a certain cachet, their international branches are mostly independent and legally distinct members of the various global networks. And Singapore observers said that the British committee's recommendations may not bear fruit here.

Corporate governance expert Lawrence Loh, from the National University of Singapore Business School, told BT: "As accounting firms can offer both audit and non-audit services, including consulting, the onus is on these firms to manage the conflicts of interests professionally.

"The Big Four firms here normally have strict independence requirements on whether and how their auditors may be involved in non-audit services to their audit clients. But the challenge is always the intense competition amongst the Big Four as well as the medium and smaller players."

Associate Professor Loh added: "The need to manage potential and possible conflicts of interest amongst the accounting firms is even more challenging, given the deepening involvement in and widening scope of non-audit work."

But, pointing to the Accountants Act's Code of Professional Conduct and Ethics, observers also asserted that the the rules here offer safeguards in Singapore's audit industry.

The Accounting and Corporate Regulatory Authority noted that when more than half of a firm's annual fees from a listed client are for non-audit services, it must inform governance units such as the board of directors or the audit committee, and discuss possible actions, such as independent, external quality control reviews of the audit engagement. This is a local tweak to guidelines from International Ethics Standards Board for Accountants, a spokesman said.

Lim Wei Wei, head of governance and risk at accountancy firm Baker Tilly TFW, told BT: "The current regulatory regime in place has sufficient safeguards against conflicts of interests and, therefore, breaking up the Big Four firms into audit-only firms may not be an absolutely necessary measure. Ultimately, independence is a state of mind."

Mr Lim added, in a reference to issues such as audit efficiency and client confidentiality: "What has been mooted in overseas jurisdictions - such as implementing joint auditors or mandatory firm rotations - all come with compromises, which have to be seriously considered."

Isca's Mr Lee cautioned: "Any non-market driven intention to artificially create more competition needs to be considered thoroughly and approached with caution, with extensive consultation among all parties involved. This is especially so for a relatively small market like Singapore."

PwC's British chairman, senior partner Kevin Ellis, said in a media statement in mid-May that the dearth of choices in the industry "is a market issue, driven by the complexity of large international businesses which require significant size, scale and expertise in their auditor".

The firm's Singapore office told BT that it "will continue to closely follow the developments of the profession across the world".

Meanwhile, EY's Asean and Singapore managing partner, Max Loh, said: "We recognise the importance of the current dialogue around our profession. Our absolute priority is to serve and protect the public interest." But he added: "At this stage, it would be inappropriate to speculate on the impact from the ideas being discussed in the UK."

KPMG Singapore declined to comment for this story, and Deloitte did not respond to BT queries.