Profile: Kari Hale, Financial Services Authority

If you’re a Big Four partner, Kari Hale must seem to occupy a terrifying
position. A former Deloitte and Andersen partner himself, Hale monitors the work
of the Big Four at the Financial Services Authority, to ensure the efficient
operation of no less than the capital markets as a whole.

Hale is not, however, about to start landing Big Four partners with huge
fines, or seek to discipline them for breaches of professional practice. His
role is not to regulate, but to draw up contingency plans should the unthinkable
happens and one of the Big Four disappear. Not only that, but with the
government taking an interest in the structure of the UK audit market, he is
also a key opinion former on the inside.

Hale started his career at Andersen. He had wanted, he says, to head towards
a ‘corporate finance sort of career. ‘I discovered I was stimulated by the work
at Andersen.’

When Andersen became Deloitte, he became a Deloitte partner too. So he should
know about what the risks facing the Big Four are, in that sense. He says he
will certainly lose part of his stake in Andersen.

‘We have not reached six years after the dissolution of the partnership
within which people can lodge claims. I do know we will lose some money,’ Hale
says.

Andersen experience ‘informs’ his work more than it ‘colours’ it, he says.

‘I have a fairly clear understanding both of the reality that there are risks
to the continued existence of any of the Big Four, and a fairly clear
appreciation of what sort of iceberg might sinks one. It’s one of the issues
that we observe closely in the context that the markets are significantly
reliant on the services provided by the Big Four.’

He doesn’t expect the Big Four to become the Big Five any time soon.

‘It’s unlikely there will be an organically developed competitor to the Big
Four in the medium timeframe by which I would say five to ten years. We have a
concentration risk.’

He defines his role. ‘We have to check whether they are conducting affairs in
a way that appropriately mitigates the risk. We also need to think the
unthinkable and prepare with appropriate contingency plans.’

Avoiding the iceberg

There are two icebergs in his view. ‘Litigation or a serious regulatory
breach and the reputational impact of that.’ And he has already formulated plans
to tackle them.

‘There are two things we can do. We can work with the firms and with other
agencies to seek the best mitigation against the risks that we can have. We can
make sure the firms have the quality focus. Are they conducting audits to the
right standard? Is regulation supportive of delivering those desirable
outcomes?’

He is disappointingly, though understandably, coy about the contingency plans
if it all goes wrong .

‘We are continuing to work on them, and it would be premature to say anything
now.’

So what about him? He mentions that he had potentially seen himself as an
investment banker when he was training at Andersen, and at the FSA, clearly sits
astride the investment and accounting communities. But he avoids taking sides
and slotting himself into a pigeon hole.

‘I see myself as an accountant and as a business adviser,’ he says, neatly
avoiding any too obvious affiliation.

He also has an apt metaphor for what accounting is all about. ‘In many ways I
would compare the skills of accounting and the general capabilities one is
trained in as an accountant to being able to play scales. You have to be able to
do it to play music but playing scales does not create music. The real skill is
to be able to use the competence.’

Of the accounting world – the circuit of institutes, Big Four partners and
finance directors – he is inspired.

‘I find the people in the institutes and in the Big Four firms are consistent
in their thinking. They are concerned about issues, and continue to display a
professional ethos and interest in the welfare of capital markets,’ he says.

It has its limits. ‘One has to be aware that there’s a commerciality in the
activities explicitly of the Big Four and perhaps more implicitly in the
institutes in so far as safeguarding the interests of their members. We have a
subtly different agenda as a regulatory agency.’

Hale could be seen as something of an outsider in the FSA, but he is slightly
taken aback by this suggestion.

‘This is an organisation of over 2,500 people, of those only about 750 were
here when the FSA was formed at the end of the 1990s. Probably some 25-30% of
the FSA have joined at the same time or since me. I have been here for as long
as nearly a quarter of the organisation.’

He does say, however, that there is a clear difference between working in the
private and public sector, and it is clearly something that he has reflected on
deeply.

‘Clearly there are differences. The big thing is that the FSA has a very
public service ethos.’

The lack of a profit motive and the constant growth of private sector
organisations makes a difference, he thinks.

‘Everyone has strong views which can be mutually exclusive as regards the
right course of action. The culture is different. It’s very welcoming and very
open in the sense that people are happy to welcome you and embrace the thinking
you bring, but they may be challenging to it.

‘In the private sector it is easier. Organisations can through time alter
behaviour and strategies in pursuit of a definable and measurable outcome. This
is an organisation that does not seek to grow actively.’

The growth issue is, he says, one of the things that is most acutely
different.

‘At Deloitte we used to grow at 10% and that enables you to make room for a
new generation of partners to come though each year. Here, we have so many
directors and managers. Next year there will not be more directors and managers.
The value add in the public sector thus becomes very different. It’s less
tangible and in a benign sense it’s more political.’

Actualisation

The nature of people’s ambitions is thus different. ‘Actualisation is often
more about the good that they do than it is about the reward that they extract
or promotion they seek to achieve. When we try and change behaviour we have to
persuade people it helps them to do their job better. It’s a much more textured
and complicated challenge. I have a great deal more sympathy now for those who
work in the NHS and in the public sector as a whole as a result.’

As far as his own ambitions and goals are concerned, Hale is not looking
beyond his current role at the moment.

‘I am thoroughly enjoying what I am doing. The goals I am driving towards
here I have not yet achieved. I expect to be contributing to the management team
here for some time.

‘Will I become a career regulator? I have more of an open mind to that.’

But, he seems to warm slightly more to the idea of going back to the private
sector. ‘I could see myself moving into the commercial world or back into
private practice.

‘One of the things my work has done is it has brought me into contact with
the Big Four and the importance of their work. I think I could see myself going
back into the auditing world. I have a renewed passion for and sense of the
value of a good and external audit.’

THE IFRS CHALLENGE

Supervising the potential impact of the possible demise of the Big Four is
one of the two big issues Kari Hale is faced with. The other matter he is
involved in, as if monitoring the health of the Big Four were not enough for
him, is IFRS. What is his take on the standards, which are currently of course
going through a rocky patch?

‘There’s a valuable goal as regards greater consistency in international
reporting,’ he says.

‘It is clear there are very significant costs of transition,’ he says.

His reflection is that we may only find out in the next 18 months whether or
not IFRS is going to work.

‘The interesting and unresolved question that we will get the answer to in
the next year or two is: are we at the bottom of the change curve and about to
come up on the other side, or have we changed to something “worse”.’

‘A lot of people are at the bottomof the curve. The question is oncepeople
have raised their level of understanding and they have absorbed the information
will they climb upthe other side? Can they understand all these disclosures? Is
it useful that all these people are all reporting under the same framework?’

‘They may feel this is simply producing arcane, theoretical, elegant but
impractical, not usable information. I wouldn’t downplay that there’s an issue
now that finance directors are producing numbers they do not intuitively
recognise. Boards are being presented with numbers they find comparatively
impenetrable.’

Everyone is ‘not yet convinced’ he says.