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Big Four Audit Firms and Non Audit Services

I recently read two articles (here and here) about KPMG and a $100m Capital fund it created. Long story short, KPMG is trying to find a way to diversify its operations in the UK and expand its business by investing in new technology start-ups.  The article on bloomberg was obviously negative to something like that due to potential conflicts of interest.

I don’t see how this can be a surprise since all of the Big 4 audit firms mention in their latest annual reports that they are seeking to expand their operations (for example data security) and offer services beyond the usual audit and tax services.

It’s not something new either. Accenture was created as part of Arthur Andersen. Apart from that, the big four audit firms employ approximately 650,000 people worldwide or more people than the city that I currently live in. The markets are changing and the competition in the audit markets becomes stronger and stronger (resulting in lower margins for the audits). So it does make sense that big private companies like these four companies are trying to grow and expand beyond what one might call a saturated and competitive audit market.

It’s like the banks have not diversified their operations beyond the usual lending operations. Most banks nowadays offer fund administration services, insurances and other services or products that are not directly related to banking operations. They have also invested in other irrelevant (and not all of them profitable) things (see RBS or Lloyds in the UK).

A key question however is indeed whether a conflict of interest exists. A problem will arise when an audit firm audits a company it has invested in but as the KPMG Senior Partner mentions in this interview, KPMG could be able to provide advisory services.

One might argue that KPMG is so big that while the investment might exist, the engagement team might still be independent and that safeguards could put into place to offer non statutory audit services. However, the problem arises when KPMG audits a competitor of a start-up that KPMG has a invested in. I would say that it’s an interesting move and it might initiate a debate going forward. The timing is interesting as well with the Competition Commission in the UK having recently decided on the mandatory audit tenders every five years.

 

Filed in: Accounting, Blog

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