The MSI Global Alliance Perspective

The real reason behind Big 4 reintegration ... perhaps

Recently, a number of articles and comments have emerged about the Big 4 accounting firms beginning the process of reintegration - reversing the post Enron and Parmalat trend of disassociation, which was primarily driven by the desire not to be ‘The next Andersen’.

Those promoting the concept have argued that closer integration allows for more effective control and risk management, and that those benefits far outweigh the downsides associated with the increased risk of vicarious liability.

Sceptics, though, seem to be taking a rather different line. With litigation against firms one of the inevitable consequences of the current financial crisis, the future of some firms will once again be in the spotlight. And whilst regulators will do all in their power to avoid the demise of another Big 4 firm on a global or even regional basis, they may have been prepared to see a firm suffer – or even disappear – in a particular country ‘pour encourager les autres’ ... unless, of course, that proved to be impossible because all the firms within a global network were so inextricably linked.

This was certainly the view of one former FTSE 100 Finance Director that I spoke to yesterday. Healthy scepticism – or unfair and baseless? As with so much in the current climate, who knows? Only time will tell.

James Mendelssohn (jmendelssohn@msiglobal.org)

The audit profession - post the credit crunch

With the credit crunch lurching from one crisis to another, few can predict where it will end.  The only thing that the pundits seem to be able to agree on is the unpredictability of the whole situation.

One point, though, that does seem reasonably certain is the fact that, when the dust does finally settle, there will be a number of powerful groups, particularly within the US, demanding answers to some difficult questions.  Why did the regulators allow the situation to develop into the crisis that it has quite clearly become?  Why did auditors sign off reports on business models that were at best speculative and at worst unsustainable?

Too many people have lost too much money for there to be anything other than a string of high profile court cases in an attempt to resolve some of these issues.  And, more often than not, it will be the auditors who are in the firing line.

At the beginning of the summer, long before we were aware of Fannie Mae, Freddie Mac, Lehman Brothers, AIG and all the others that are yet to surface, the six largest firms had 27 cases outstanding against them in which the amount being claimed exceeded $1 billion.  In seven of these cases, the amount exceeded $10 billion.  These are uninsurable sums.

Ever since the Andersen case, though, many have said that the regulators will never allow one of the remaining 'Big 4' firms to disappear.  The reduction in choice and competition would be unacceptable.  But we are now moving well away from the arena in which the regulators have any control.

So what does the future hold for the auditing profession?  WIll the 'Big 4' survive?   Will the function be nationalised?  Anthony Hilton, of the London Evening Standard, who has a reputation for thinking outside the box, has even questioned whether audit itself will survive.  That's a difficult one, but it may not be beyond the realms of possibility.

James Mendelssohn (jmendelssohn@msiglobal.org)