Recent actions by Michel Barnier, the EU’s Internal Market Commissioner, have thrown other cases of regulatory inaction into stark relief. Barnier has proposed measures to tackle the concentration of power and conflicts-of-interest that exist among the Big Four accounting firms. These firms have a near monopoly on the auditing of the world’s largest and most important companies. This is compounded by the fact that they’re paid by these companies, not just for the auditing, but also for various “consulting” services that they can and often do provide. These conditions often lead to auditing work that is, shall we say, less rigorous than it ought to be. There are many examples of this, unfortunately, but a particularly nasty one is the recent case of Japanese company Olympus.
It’s not hard to agree with Barnier’s following statement:
The financial crisis highlighted weaknesses in the statutory audit especially with regards to banks and financial institutions. Concerns around conflicts of interest have been expressed as well as the potential for an accumulation of systemic risk as the market is effectively dominated by four companies (“the Big Four”), namely Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.
There’s also much the logic in his proposals to address this by forcing companies to rotate their accountants every six year, cutting red tape for smaller auditors and forcing the Big Four to split their auditing units from their consulting units, amont other measures. (As expected, the Big Four are livid and claim that there’s no proof that these measures would improve audit quality, prevent financial crises, etc.)
It’s not certain that Barnier will get his way on this, but at least he’s trying. It leaves me to wonder: why can’t the banking industry get similar treatment? I find it insane that there’s no similar effort to downsize and curtail the Too Big To Fail banks. Instead we have a G20-sponsored list of 29 financial institutions ”whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity” and a bunch of untested measures that directly address neither the size, nor the complexity nor the systemic interconnectedness. On the contrary, this list of Systemically Important Financial Institutions (SiFis) seems to serve more as shorthand for “all the banks we’ll have to backstop, come what may.” So much so that some banks were actually disappointed to not be included on this list when it was published last month! Ugh! When are we finally going to do this right?