By Karen Noble Jacob
[dpopcap]T[/dropcap]he last two years have generally been very profitable for the “Big Four” auditing firms. The primary source of their expansion arises from automated technology integration in the forms of artificial intelligence and blockchain. The Big Four, comprised of auditing firms Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers, have cashed in on the blockchain trend ahead of market integration, offering new blockchain auditing systems for businesses. Needless to say, technological innovation with business applications is very profitable (worth around $200bn in savings), and these companies want a share of that. Unfortunately, blockchain is marketed as an auditor-killer. In theory, if a company buys into Deloitte’s blockchain, which can instantly and automatically audit the company in its entirety and provide accurate record keeping for compliance, then they no longer need Deloitte’s services for an external audit. Which means by selling a client access to this new product, Deloitte will no longer receive any revenue from auditing. PwC foresaw that problem, and it has a very simple solution: after selling you a blockchain system that can audit your company, it will audit your blockchain.
On the surface, their new service seems redundant and exploitative. After selling consumers a product designed to reduce their need for external auditors, these firms want to charge their customers for service and maintenance. That’s not to say that PwC doesn’t have a point; it is correct in saying that clients considering blockchain need experts to reorganize their compliance efforts and integrate it, and they do need a reputable firm to provide that service while the government still considers the legal validity of blockchain-based auditing. The main problem, however, is the way that these firms offer their blockchain services. Almost all of the Big Four have multiple divisions: one auditing division, which was their core service, and relatively new consulting and advisory divisions, which has overtaken auditing in terms of revenue. If PwC sells a blockchain-auditing system to a bank, it is actually PwC’s consulting division providing blockchain auditing to the bank. However, the service of auditing the blockchain-auditing system is provided through PwC’s auditing division. By selling a product through its consulting division, and then earning revenue by servicing that product through its auditing division, PwC and the rest of the Big Four open themselves to fire from antitrust watch dogs, and that fire could get a lot more intense in the United Kingdom and the European Union, where the firms are already in hot water from regulators for reckless auditing practices.
For years, UK’s Financial Reporting Council has considered breaking up the Big Four, fueled by calls to action from MPs who look to KPMG’s accounting failure with construction firm Carillion as evidence that the auditing industry is corrupt. Carillion, a British former-multinational construction company, became the largest trading liquidation in the United Kingdom after it collapsed under £7bn of debt despite an “all-clear” from its auditor KPMG to shareholders. But regulation takes a long time, and the temporary restrictions placed on the audit industry have yet to stop expansion–in fact, all but nine companies on the FTSE 350 were audited by the Big Four. Compound the time to introduce legislation for the auditing industry with the increase in revenue streams from offering blockchain in international markets, and regulators now have reason to fear damage to economic well-being, not just of corporations domiciled in Britain, but to all creditors, including pensioners, workers, and the government if they fail to provide adequate oversight. It is no secret that governments are slow to regulate major industries in time to prevent disastrous impacts, and the MBS-fueled recession is fresh in legislators’ minds as prominent politicians advocate to police large corporations. But with the rapid rate of innovation due to the inclusion of intelligent data in the auditing industry, regulators risk losing any control they had left. An even greater reason to be concerned is the nature of the technology involved. Blockchain is not just a one-stop tool; just as Web 2.0 and 3.0 completed changed how people interact with things, Blockchain is a gateway predicted to cause even more industry-related change than e-commerce. In the next five years, researchers expect blockchain to be widely adapted to future networks, with built-in portals of artificial intelligence, autonomous applications, and other software yet to be developed. If regulators fail to develop adequate oversight measures before blockchain becomes a widely-adopted measure, they risk an expensive and time-consuming uphill battle to regulate after the fact.
Effectively, this means that the largest international auditing firms are on a very long leash. In countries like the United States, they are in no immediate danger; it has taken close to a decade for Congress to take meaningful action against major banks for lenient securities transactions and predatory lending. However, in the United Kingdom and Europe, Big Four firms may face resistance to their new product lines. Already under intense scrutiny, it is likely that their respective compliance departments have carefully scoped possible regulations that could become legal issues for the firm and have kept those recommendations in mind when plotting the strategic business flow in European markets. But given the vast size of the firms, even a record EU fine of $5bnagainst any one of the firms would not make a dent in KPMG’s 2017 revenue of $26.4bn, next to EY’s $31.4bn, PwC’s $37.68bn, or Deloitte’s $39bn. This is not an ideal situation, nor time, for European regulators, especially in the United Kingdom, where the Big Four all have UK domiciled subsidiaries that write 97.4% of the most profitable business in the country. After several accounting scandals since the global recession, the British public is largely calling for closer regulation. Any actions the legislature had planned to take to restrict the infamous auditors prior to 2015 have been stalled now that the majority of the British government is frantically working to meet the Article 50 deadline on 29 March 2019 for Brexit. Compounding the macroeconomic woes regarding its Brexit deal is the worry that the largest businesses in the financial services industry are planning their moves to the EUafter increasingly difficult compliance in the UK. There’s no fear that the Big Four will pull all their deals from the UK (after all, Deloitte and PwC both have large domiciles there), but through some corporate legalese, it may be possible to begin writing business offshore to minimize their risk exposure to British regulators.
For now, no regulator or business analyst knows exactly where the fight is heading. While governments have censured large corporations in the past, the sheer size of the ties between the Big Four auditors and the UK could prove to be an obstruction in any attempt to regulate, and with political turmoil in Western Europe, any predictions by compliance analysts and actuaries are in the wind as radically different political statements change headlines every few hours. It seems that until Article 50 is triggered, the UK will have to do its best to prevent another Carillion disaster, but the EU may have better luck with their regulating streak.