Should we separate audit and consulting?

The European Commission’s rumoured plans to force Big Four firms into separating audit from consulting are a classic case of barking up the wrong tree.

The plans aren’t all bad. Mandatory auditor rotation strikes me as being entirely sensible and wouldn’t go amiss in some consulting relationships, too, but it will also have little practical impact as most corporations effectively do this. But the idea of two auditors isn’t so much the wrong tree as simply barking. Reaction to the idea has rightly focused on the likelihood that things will fall between the large and small auditor stools – and the nastier the issue, the higher the probability that that will be the case. A weird version of pass-the-parcel would ensue in which the auditors throw problems between them in the hope they won’t get caught holding it when the music stops.

But these ideas, I suspect, are all just fairy lights strung out to decorate the main tree, the question of whether a single entity can provide both audit and consulting services without its independent judgement in the former being influenced by its profits from the latter. And the problem here is not really one of objectivity and conflict of interest: it’s that auditing is a barely viable industry. A decade of low margins and escalating risk means that (at least the big) audit firms can only attract the people they need, maintain their training programmes and invest in the quality assurance /compliance process required by doing other types of work. The dominance of the Big Four is proof of this: it’s not barriers to entry that drive such consolidation but a business which is so unattractive than no one in their right mind would enter the market. It explains, too, why there have been no disruptive innovators here and why the pace of technological change is glacial compared to other sectors.

Take away the more lucrative consulting business and who’d be an auditor? Certainly not governments or regulators: why would they rush in where corporate angels fear to tread? A public auditing agency is no more likely (some would argue a lot less likely) to flag up problems than the current regime; it would add costs at a time when the public sector is trying to cut them; and would open the door to law suits from disgruntled shareholders.

By focusing on the Big Four tree, the European Commission risks not seeing the wood.