MORALITY VERSUS INDIFFERENCE - By Bashorun J.K. Randle

Probably unknown to the generality of the public, the debate over the selection of auditors has been gaining momentum, even to the point of becoming a major controversy or crisis – but not on the scale of threatening to set off the Third World War. Actually, it has been simmering for several years. It was “The Times” which pulled the trigger with its front-page report on September 3, 2018.

Headline: “BIG FOUR REFORMS FAIL TO BOOST COMPETITION”

“KPMG and Deloitte now audit as many of Britain’s largest companies as PWC, which has long held the top spot, after winning 14 new FTSE 100 clients between them in just over a decade.

PWC audited 41 of Britain’s largest 100 companies in 2005. It has been losing such contracts since the introduction of European rules in June 2016 that required companies to put the job out to tender once every decade and to change auditor at least every 20 years. It now audits 27 of Britain’s top 100 firms, according to Adviser Rankings, a data provider.

Meanwhile, since 2005 Deloitte has increased the number of FTSE 100 companies that it audits from 19 to 27, while KPMG also has 27 clients, up from 21 in 2005.

The three-way split between PWC, KPMG and Deloitte suggests that European rules designed to improve competition and increase choice in the audit market have failed, as large companies required to change their auditors repeatedly have appointed another firm from the accounting industry’s Big Four.

Companies have shifted between the same accounting firms despite them being dragged into scandals such as the collapse of Carillion, the public services contractor, and BHS, the department stores chain.

PWC was fined a record £6.5million by the Financial Reporting Council over its audit for BHS in June, while in recent months KPMG was fined £3.2 million over its audit at Quindell, a technology company, and £3 million for work at Ted Baker, the fashion retailer. Deloitte is being taken to an enforcement tribunal by the FRC and could face a fine of up to £10 million over audits for Autonomy, the British software+ business.

EY, the other member of the Big Four elite audits 17 FTSE 100 companies, down from 19 in 2005, Last week the nine biggest accounting firms – the Big Four plus Grant Thorton, BDO, Mazars. RSM and Moore Stephens – handed a list of proposals to the Competition and Markets Authority to improve competition.”

The “Financial Times” which had kept its powder dry, unleased a powerful salvo from Grant Thorton on its front page, ten days later on 13^th September 2018.

Headline: “AUDITOR SELECTION FOR BIG COMPANIES SHOULD BE NATIONALISED, SAYS GRANT THORTON”

“Grant Thornton has called for the nationalisation of auditor selection among Britain’s largest companies in an effort to break the oligopoly of the big four firms.

The UK’s fifth largest accounting firm said the radical proposal would improve a swath of weaknesses in the audit market, including widespread conflicts of interest and poor audit quality, which have heavily undermined confidence in the profession.

Jonathan Riley, head of quality and reputation at Grant Thornton, said the firm wanted auditor selection for large listed companies and other public interest entities to be carried out by a public body such as a newly established commission or the National Audit Office.

Mr Riley said placing responsibility for auditor procurement with an independent public body would address the “perennial issue that audit clients select and pay the auditor”. He added that this would help restore trust and integrity in the market at a time when there “seems to have been a loss in impartiality and independence”.

Grant Thornton has floated the idea with Britain’s main political parties, the CBI, the competition watchdog and the ICAEW, an industry body. The firm said it expected companies and the big four to be resistant to the proposal, although it had received warmer than expected feedback from the CBI and the ICAEW.

Gervase MacGregor, an audit partner at BDO, the sixth largest firm in the UK, said he was initially sceptical about the benefits of a national procurement body for auditor appointments, but said he has “come around to the idea”. But he added that BDO’s stated position of introducing market share caps to address competition concerns would be more effective.

Grant Thornton additionally wants a ban on accounting firms offering any kind of consulting or advisory work to major audit clients — a measure also backed by BDO and privately by some partners within the big four.

Nationalising auditor procurement would theoretically address two significant concerns about the audit market. First, that auditors are overly beholden to company management and fail to flag problems at the companies they vet because they want to hold on to their fees at all costs.

Second, that company management teams are biased towards selecting the big four firms, helping to entrench their already dominant position in the market. At present, EY, Deloitte, KPMG and PwC audit 98 per cent of the constituents in the FTSE 350 index of Britain’s largest listed companies.

Grant Thornton believes that if the UK adopted the proposal, it would be the only country globally where auditor selection for privately owned companies would in effect be nationalised.

The proposed system would mirror an existing framework for auditor appointments in Britain’s public sector, which have been overseen since 2014 by Public Sector Audit Appointments Limited.It appoints auditors and sets audit fees for local government and police bodies, helping to remove big four bias and enabling smaller firms such as Grant Thorton, which has an estimated 40 per cent market share in the public sector to compete.”

 

Bashorun Jk Randle

As the steamy cauldron was threatening to boil over, it was the timely intervention of the President of the Institute of Chartered Accountants in England and Wales [ICAEW], Mr. Paul Aplin that provided some element of reassurance by exhorting Chartered accountants to be morally energetic. In addition, the Institute released the following statement in support of “The Financial Times”: “AUDIT REFORM IS NEEDED BUT WILL TAKE TIME”

“The Financial Times is absolutely right that a shake-up of the audit market for large listed companies is now urgently required. ICAEW agrees a market share cap is fast emerging as a viable way to bring about real, sustainable and beneficial change.

We also need to consider the interests and behaviours of buyers – in this case the audit committees of FTSE 350 companies — so that going beyond the Big Four is not seen by them, and those they answer to, as a controversial choice.

But we must be realistic about timescales. Even if, as you suggest, the Big Four agree to give the next tier of firms access to their technology, and even if clients get fully on board with using these “challengers”, there is a simple issue of scale.

For these firms, getting to a position where they can take on large multinational audits will take time: this is not an issue of quality — there is plenty of that — but of capacity.

Nor is it insurmountable, but we must have realistic expectations with regard to how long it will take. Impatience, and the imposition of simplistic or hasty measures, risk not only adverse unintended consequences but could significantly damage global perceptions of the UK as a place to do business.

There is a broad consensus across the accountancy profession that we are at a watershed moment, and that change is necessary. There is also agreement around what might be practicable and effective. It will not serve the public interest if, in the interest of securing a sprint finish, we fall at the final hurdle.

-  Michael Izza

Chief Executive, ICAEW, London

However, thatwas not the end of the matter. CNN went viral with itsBREAKING NEWS:“THANKS BUT NO THANKS”

“Grant Thornton has said it will notpitch for the lucrative job of auditorto Goldman Sachs, the investmentbank, in Europe, despite a campaignby MPs from three Commons selectcommittees to persuade bankingregulators to sign off on theproposed appointment.

Chief Executive of Grant Thorton, Sacha Romanovitch said that theaccounting firm would not pitch forthe audit unless it saw a significantshift in how big corporations inBritain bought audit services. Thisyear it stopped bidding for auditcontracts from FTSE 350 companiesbecause it was too expensive tocompete with the Big Four firms.

"We've made our position reallyclear and we're not changing forGoldman Sachs just because we'vebeen invited [to pitch]," she said.

"We've ruled ourselves out for now."

Goldman Sachs has had talks withGrant Thornton as the bankapproaches a review of its auditingin the UK in 2022. However, theBank of England's PrudentialRegulation Authority has expressedconcern about Grant Thornton's ability to audit a big bank. MPs accused the Bank of prohibiting competition in the audit market by querying whether Goldman should appoint a non-Big Four firm.”

It was left to Saturday Night Live hosted by Colin Jost and Michael Che as well as Trevor Noah on the Daily Show to zoom in on Sacha Romanovitch the big boss [Czarina of Grant Thorton] who they chose as the new rival to both President Donald Trump and Sacha Baron Cohen (British actor, comedian, screenwriter, and film producer most notably known for creating and portraying the role of ‘Borat Sagdiyev’ in Da Ali G Show).

The background to it all was the front-page story in “The Times”on October 5. 2018:

“MY JOB ISN’T TO BE POPULAR – BUT THIS FELT HORRIBLE”

“There was no mistaking the pain when the blow struck. A group claiming to representthe views of 15 colleagues at Grant Thornton had sent copies of Sacha Romanovitch's performance review to newspapers, alongside claims that she had "misdirected" the firm. It hurt like a gut-punch delivered over mobile phone as the onlyfemale boss of a big British accountingfirm was on her way home to Devonfrom her office in London.

"It felt horrible, but I had to step back,think what can I learn from this andremember that as a chief executive myjob isn't to be popular."

She may be more popular than sherealised at the time. Since then sheclaims to have received about 900messages of support, with colleaguesand peers at rival firms sending cards,emails and messages on social media.

Ms. Romanovitch undeniably hasmade waves at Grant Thornton and inthe wider accounting profession in thefour years since she took on the job ofchief executive. A former audit and taxpartner who joined Grant Thornton 30years ago, she immediately capped herown remuneration after being voted into the post in 2015. As a result, she receives no more than 20 times the average salary at the firm, far less than other city bosses. She also led a move to turn Grant Thorton into a shared enterprise, in which all its 4,500 workers have a stake in the firm, and decided that the business would stop bidding for audit contracts from Britain’s largest listed companies, which dealt a blow to efforts by Deloitte, PWC, KPMG and EY to convince politicians and regulators not to intervene to improve competition in the market.

That appears to have angered some of her colleagues. The group of dissenting partners accused her of damaging profits by focusing on a higher social purpose" and said that she had a "socialist agenda" that could damage the firm'sstanding as a serious challenger to the Big Four.

"When you're going through changehaving that resistance is completelynormal," Ms Romanovitch said, speaking publicly for the first time since theleak. "In fact, if you're trying to run abusiness with total consensus on everydecision, you're probably running abusiness that will fail."

She said that being chief executive ofGrant Thornton was a lonely jobbecause she had to make decisions thatsome partners would find painful in theshort term in order to create a businessthat she believes will be sustainable inthe future and doing it at a time thatthe accounting profession is facingintense scrutiny from MPs and regulators and probably will be subject tosignificant upheaval.

"If I've got 80 per cent of thepartnership with me, that's enough tothink I'm in a sensible place," she said.Those decisions could include moves toreview Grant Thornton's 27 offices inthe UK and have resulted already in anumber of restructures that have removed some partners' autonomy tomanage their own practices and clients.

The scrutiny of Britain's accountantscomes after several scandals in the auditmarket and a series of company collapses that have raised concerns about thequality of audits. The competitionwatchdog could launch a full investigation into the sector that, in turn, critics suggest could lead to a break-up ofthe Big Four," Ms Romanovitch said. "It would be a bizarre move because it wouldn't improve audit quality or stop conflicts of interest.”

Instead, the existing model of financial reporting and how companies are audited needs to be overhauled. “We have an audit product where increasingly there is reams of legislation and boxes to fill in that make it harder for an auditor to step back and ask what is actually going on at the company. The solution is not layering on more legislation or penalties.”

In the next few weeks, Ms Romanovitch will seek a second term as chief executive, a role put to a vote of the firm’s 200 partners. Grant Thorton’s board will sound out whether any partner at the firm wants to challenge her leadership, although a number of partners at the firm privately have described the idea of running against her as “career suicide” and believe that she is likely to run unopposed.

“Fundamentally, do I think I’m the right person to lead this firm now? Yes.Do I think there is unfinished business, in terms of delivering what I set out to achieve? Absolutely.” If the partners decide to vote against her, she won’t“cling on...you can’t run a business if you’re held hostage to a few people who are unhappy”.

The classic summation of the consequences of the conflict between morality and indifference has been provided by Pastor Martin Niermöller’s vintage poem:

“first they came for the socialists and I did not speak out – Because I was not a socialist

Then they came for the trade unionists, and I did not speak out – Because I was not a trade unionist.

Then they came for the Jews and I did not speak out - Because I was not a Jew.

Then they came for me – and there was no one left to speak for me.”

Those poignant lines will haunt us for eternity as Martin’s confessional testament regarding the cowardice of German scholars who witnessed at first hand the rise of the Nazis (led by Adolf Hitler) to power and the subsequent extermination of their targets, segment by segment and group after group.

Thankfully, not everyone has taken the oath of silence, the first Military Governor of Plateau State, Nigeria, and a leader of the defunct National Democratic Coalition [NADECO], Ambassador (Air Commodore) Dan Suleiman (Rtd.) has served us notice:

“Like back in the days of General Sani Abacha, Nigeria is on the edgeof a precipice. Nigerians are divided along various fault lines – religions, tribal and so on. It is not a situation where anybody will be happy to live in. We have had better days in Nigeria before but these are worse times.”

We also have the incisive intervention of a former Governor of Anambra State, Nigeria, Mr. Peter Obi who declared on CNN:

“Nigeria’s economy remains on life support. The national debt may spiral out od control. When you keep borrowing for consumption, it gets to a stage when you cannot control it. Some people take the simplistic approach of comparing debt to GDP [Gross Domestic Product]; but our GDP is low. Therefore. We should be looking at debt to revenue.”

It was “ThisDay”newspaper of September 21, 2018 which spilled the beans with its front-page report: “NBS: DOMESTIC, EXTERNAL DEBTS HIT ₦15.63 TRILLION, U.S. $ 22.08 BILLION IN Q2”

“Nigeria’s total domestic and foreign debt stock stood at N15.63 trillion and $22.08 billion respectively, as at June 30, 2018, the National Bureau of Statistics (NBS) has stated.

This is as the Statistician General of the Federation/Chief Executive, National Bureau of Statistics (NBS), Dr. Yemi Kale, Thursday promised that the days when agencies of government published poor statistical figures and got away without questions being asked were gone.

According to the Nigerian Domestic and Foreign Debt (Q2 2018), posted on its website, out of the N3.48 trillion total domestic debts borrowing by states, Lagos accounted for 14.88 per cent, while Anambra had the least debt in the category with a contribution of 0.08 per cent to the total domestic debt stock.

However, the foreign borrowing consisted of $10.88 billion from multilateral agencies; $274.98 million from bilateral (AFD) and another $2.12 billion bilateral from the Exim Bank of China, JICA, India and KFW, while $8.80 billion was commercial.

Lagos State had the highest foreign debt profile among the 36 states and the Federal Capital Territory (FCT) accounting for 34.17 per cent and 6.57 percent in national share.

Its external and domestic debts were recorded at $1.45 billion and N517.36 billion or 14.88 per cent of share in state total.

Edo accounted for 6.57 per cent of external loans at $279.02 million; Kaduna, 5.48 per cent or $232.96 million; Cross River, 4.56 per cent or $193.79 million and Bauchi, 3.18 per cent or $134.90 million.

The foreign debt profile of Bayelsa, Benue and Borno stood at $57.25 million, $34.75 million and $22.29 million respectively.

The Statistician General of the Federation/Chief Executive, National Bureau of Statistics (NBS), Dr. Yemi Kale has promised that the days when agencies of government published poor statistical figures and get away were gone.

He noted that the public has become better enlightened as “they question and interrogate every figure or information we publish.”

Speaking at the opening of the sensitisation workshop for the conduct of the 2018/19 National Living Standard Survey (NLSS), which held in Keffi, Nasarawa State, he harped on the need for quality data representation going forward.

“As Statistician General of the Federation, I can easily estimate that, I spend about 50 per cent of my working day, and sometimes weekends, explaining and defending numbers or information that we publish in NBS.

People now want to know where we got the numbers, how we got the numbers and what the numbers mean for them as individuals, businesses or for their communities.

While we welcome this new enthusiasm and public engagement in statistics, we also have no alternative but to do all in our powers to get the best quality numbers possible.”

He said the NLSS had become critical in view of all the visible socio-economic challenges being experienced in the country, particularly security, unemployment and environmental constraints.

He said government and partners at various levels require the household survey “to help them understand what is going on, particularly how these challenges are affecting households and communities in the country.

“If we ever needed to generate reliable and good quality information, that time is now.”

According to the SGF, the survey which determines poverty index was critical not just for the statistical system but also the country in general.

Kale said: “Among the plethora of socio-economic variables and indicators it provides, it is from this exercise that we derive statistically sound indicators for measuring poverty and inequality in Nigeria.

“It also serves as a major source of data for the 2030 Sustainable Development Agenda for tracking Nigeria’s attainment or otherwise, of the Sustainable Development Goals (SDGs).”

However, he said the NLSS, would for the first time be carried out using electronic means of data collection.

Also, the daily calorie threshold used in computing the poverty rate had been dropped to 2,500 from the previous 3,000 calories per day in the current exercise.

He said: “The last time this survey was carried out was 2009/2010, it’s meant to be done every five years but due to funding and some challenges we were not able to conduct it in 2014. We have been working on this for three to four years.

It’s a year long stuff, ordinarily you will not find poverty estimation until 12 months and the reason is, as we all know we all have spending patterns at home and they are not the same every month, so we have to take the overall expenditure for the whole year so that the periods of high and low expenditures are captured.

So it’s going to take one year for us to get the final poverty and inequality numbers. But like I mentioned earlier there are some indicators that we can be publishing quarterly as we go along but the poverty numbers will not be ready until 12 months.”

What has sent alarm bells ringing is the wake-up call by the Bishop of Sokoto Diocese, Nigeria Rev. Matthew Kukah on the theme: 

“HOW TO MAKE DEMOCRACY WORK FOR AFRICA”

“Democracy requires lots and lots of patience and hard work. And I think we are mightily grateful to ourselves as a people that despite the frustrations, despite the temptations, unlike before: we have witnessed 16 to 17 years of patience on the side of the military because if it were 20 to 30 years ago, we would have had at least three or four coups already. I think it is a measure of the faith of the military itself on the urgency of democratization that has kept them in the barracks. But I think the politicians and the political class cannot take this patience for granted. What we have experienced in the last few years has made us a laughing stock of other nations.”

Indeed, the statement attributed to the Deputy Senate President, Sen. Ike Ekeweremadu goes beyond serving as a severe jolt:

“The problem in Nigeria is that our democracy is receding. Who says army cannot take over, let us not joke with our democracy that is the issue. The house of a senator was destroyed in Kaduna state; we are talking about Kwankwaso who was stopped from going to his state where he ruled for eight years. In Kaduna, Shehu Sani cannot organize a meeting and we are talking about a democracy?”

- Bashorun J.K. Randle is a former President of the Institute of Chartered Accountants of Nigeria (ICAN) and former Chairman of KPMG Nigeria and Africa Region. He is currently the Chairman, J.K. Randle Professional Services.   Email:    jkrandleintuk@gmail.com