[fc-discuss] Financial Cryptography Update: Accountancy Firms - too big to fail

[iang@iang.org]

(( Financial Cryptography Update: Accountancy Firms - too big to fail ))

                             July 15, 2005


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https://www.financialcryptography.com/mt/archives/000518.html



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Following the Arthur Anderson collapse, regulators in Europe have made
their view known to their opposite numbers in the USA:

"Any reduction in the number of major audit firms could have negative
implications, particularly for large companies in the U.K.," stated the
U.K.
Financial Services Authority, according to the FT. "We will be watching
these developments very carefully." An unnamed European Commission
official
also told the publication: "It was already an issue going down to four
[big
accounting firms]. Obviously, having only three would be an even bigger
problem."

http://www.cfo.com/article.cfm/4170399?f=home_breakingnews

KPMG has been declared too big to fail, thus bringing the big 4
auditors into the very select club of state-protected firms.  The
problem with this is of course the message that it sends to the world
of accountancy.  "If we can not be stopped, then we can do what we
like."

One has to put this in context - the Department of Justice has taken on
a tax case against KPMG.  To ease the pressure against an expected DoJ
indictment, KPMG has declared itself to be in the wrong (and thus made
easier the costly process of civil litigation by the people they
advised).

The big question is not about the particulars of the case but in how to
regulate the market.  The regulators are there and regulating;	that's
a fact, no matter how uncomfortable free market disciples find it.  One
of the rationales for regulation is that poor behaviour by dominating
firms needs to be brought to heel.  If as in some industries such as
advertising there are no dominating firms, then the market can be
expected to find its own solutions because the sector is spoilt for
choice.  However if the choice is limited to 4 large players acting in
concert, we no longer have competition.  Hence, regulation, so the
rationale goes.

So in declining to bring KPMG to heel, regulators are simply
undermining their own role.  In choosing to not pursue KPMG to the
fullest, they also choose to further weaken the viability of the audit
in an efficient market by increasing the privilege available to the big
4.

Why not simply go back to the days of state-sponsored champions and
declare auditing to be a protected business?  The reason for this is
fairly clear - regardless of the KPMG case and its predecessor Arthur
Anderson, the big 4 audit sector has lost the faith of the public to
deliver a viable _honest_ service.  Audits aren't trusted and for
obvious agency reasons, so why are regulators bothering with both
enforcing the use of an audit and letting the firms get bigger and more
powerful?

(FC context - many systems are built with audits inserted to clean up
the loose ends, as part of Governance.	Now, if one starts from the
point of view that audits are bad, one can actually do almost all the
functions of audits internally and with ones own users, using modern FC
techniques.  But we still have to carry the cost of the mandated audit,
which means that we are only interested in reducing the 'tax' paid to
subsidised auditors.)

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