Finance Monthly November 2019 Edition

them, is worrying. The other two firms that control a small share of the auditing of FTSE 250 companies are BDO LLP and Grant Thornton LLP. These numbers are the real figures on client retention, and should essentially serve as proof that the Big Four are in fact still the best, otherwise, surely the FTSE 100 or 250 would seek auditing services elsewhere? How much they are paid As the Big Four are by default considered the best, they of course also cost the most, and partners in these firms are earning figures you can only write on paper. Recent reports indicate Deloitte Partners are due their biggest payday in a decade; the average pay for 699 of Deloitte’s equity partners is $882,000 in 2019, moving up an average of $50,000 from last year. In addition, Deloitte’s combined member firm revenue has risen a chunky 9.4% to $46.2 billion (£37.4 billion) since last year, and in 2018 this number had already grown 11.3% on the previous year. The growth is volatile, but it is significant growth for the company’s bottom line nonetheless. Based on the above, you would figure Deloitte, the largest of the Big Four, is charging its worth in gold, but are the companies that are paying these huge firms getting a fair deal in return? Quality Ranking In terms of quality standards, the Big Four auditing firms are assessed and regulated, often by each other, which in a market of fierce competition between them, is a fair and appropriate method of benchmarking standards. There aren’t rankings available per se, but each of the Big Four has its own strengths and weaknesses; EY, for example, is more Europe centred and therefore by default performs better for European based firms. On the topic of performance quality, Gennaro Senatore, former Transaction Services AM at KPMG, said on a Quora forum: “…with IFRS and Generally Accepted Audit Standards I can tell you the differences are getting less and less noticeable.” He mentions PwC having an edge, or “at least perceived.” While he says that in terms of advisory, in Europe PwC has the most successful treasury practice, EY is stronger on internal audit and Risk Services, and Deloitte in implementation and IT projects. He concludes that KPMG is very good all- round and has a very strong tax practice. However, the performing results will be different for each client, for each auditing firm, so these opinions are after all highly subjective. More recently, the UK Financial Reporting Council issued a serious warning about the quality of audits of financial statements in the UK. The watchdog stated that the Big Four have YoY failed to meet the benchmark 90% target of large company audits requiring no more than limited improvements. In 2019, of all auditing firms, 75% of audits reached that level of quality. The consequence was £32 million ($39.5 million) in fines (see above for Deloitte’s bottom line and then think about how this could possibly disincentivize poor performance). Sir Winfried Bischoff, the outgoing chairman of the FRC, said in the watchdog’s report: “We are not seeing more immediate improvements from the [audit] firms and there is undesirable inconsistency across the market.” PwC KPMG EY Deloitte Average 60 55 50 45 40 35 30 25 20 15 10 5 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 The Big Four have botched almost 1/3 of all audits since 2009 (Source: https://www.pogo.org/investigation/2019/09/botched-audits-big-four-accounting-firms-fail- many-inspections/) Fig 1 12 www.finance-monthly.com FRONT COVER FEATURE - THE BIG FOUR