June 30, 2020 / 4:10 PM / 7 days ago

Breakingviews - Wirecard is argument for a Big Four pay clawback

An office building with Ernst & Young (EY) logo is seen amidst the easing of the coronavirus disease (COVID-19) restrictions in the Central Business District of Sydney, Australia, June 3, 2020.

LONDON (Reuters Breakingviews) - Auditors could soon be paid like bankers. Just not in the way that they might hope. The big four firms – Deloitte, Ernst & Young, KPMG and PwC – have all been chastened for their roles in embarrassing financial scandals like Germany’s Wirecard. Remedies like breakups or dual audits might better root out fraud. But a simpler and faster change would come from docking pay.

EY’s role in auditing the collapsed fintech is under scrutiny. The accounting giant, which earned nearly 10 million euros for checking the Aschheim-headquartered company’s accounts for 10 years, is accused of failing to ensure there was $2 billion in bank accounts in the Philippines. It also needs to explain why five different partners approved accounts in five separate years.

The scandal is not unique. Rival KPMG was ensnared in the Gupta family saga in South Africa and collapsed UK outsourcer Carillion in 2018. PwC was fined $7.9 million by America’s Securities and Exchange Commission in 2019 for violating rules requiring auditor independence. Deloitte was also fined 6.5 million pounds for misconduct in its audit of outsourcer Serco in 2019. 

Breakups could restore confidence. The UK competition regulator reckons big four firms should split off their bookkeeping units from their consulting practice. After all, with only one revenue stream, firms may be less distracted trying to win lucrative consulting fees. But given Wirecard did not use EY’s consulting arm, this remedy would be imperfect on its own.

Sharing the workload is another option. Advocates of the dual-audit solution reckon the big four would be under more scrutiny and face tough questions from their audit partner. But by dividing the labour, there is a chance that some of the work falls between the cracks, and the overall quality of an audit could be weaker.

Which leads to delayed pay. Given EY is accused of failing to fulfil the most basic box-ticking exercise for auditors - which is to confirm a company has the right amount of cash in its bank accounts - drastic solutions are unlikely to work.

Instead, audit firms could be treated like banks where the top partners, which earn an average of nearly $1 million a year, have a slab of their pay deferred, for say, seven years. With their own cash on the line, bean counters can still be fooled, but are likely to be more diligent.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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