November is turning nasty for auditors at PricewaterhouseCoopers. Two or harbinger of impending doom? PricewaterhouseCoopers has lost three major audits in the last month. John Stokdyk and Chris Quick report. weeks ago, Abbey National announced it plans to switch auditors in 1999 from PricewaterhouseCoopers to Deloitte & Touche. Then, last week, Allied Irish Bank said it was inviting incumbent auditor PwC to submit a tender along with rival firms. This week, property company Raglan also confirmed it is conducting a review.
When merger mania broke out among the Big Six last year, finance directors, accountancy experts and smaller firms all warned that as large corporate audits concentrated in fewer hands, conflicts of interest would multiply.
The spate of recent reviews suggests some of those warnings are coming true. PwC last week confirmed it has lost three audits worth more than #100,000 since the merger – Abbey, Diageo and another, unnamed client.
But over the same period, the firm says it has gained ten, including Prism Rail, the British Railways Board and the Press Association. But is there more to come?
Abbey’s defection to Deloittes is the most embarrassing. The high street bank pointed out in its official statement that it undertook its review because of concern over the concentration of banking and insurance audits in PwC’s hands.
Abbey’s audit committee chairman is Keith Woodley, a former English ICA president.
Abbey shared the concerns voiced by the FD100 group when the Price Waterhouse/Coopers & Lybrand and KPMG/Ernst & Young mergers were both mooted last year, said Woodley.
When the PwC merger went ahead, Woodley explains: ‘We felt it was so significant, it was like dealing with a new firm of auditors. We felt it was an appropriate time to conduct a review.’
PwC was invited to pitch, along with the other Big Five. The firm’s team argued that its experience with so many financial services clients was a strength that would benefit Abbey, and that Chinese walls would manage potential conflicts.
The House of Lords’ decision last week to reinstate Prince Jefri of Brunei’s injunction against KPMG cast wider doubts on the legal validity of Chinese walls, but Woodley makes it clear that no specific conflicts of interest worried Abbey. Instead, he explains: ‘There was a general concern where a major firm has clients in the same sector. The question would have to be, “Are we a priority client?”‘
Rodger Hughes, head of audit at PwC, has a robust response to enquiries about the Abbey audit. He does not doubt Deloittes’ ability to do the audit satisfactorily, but says, ‘Abbey has taken a decision to go to another firm that does not have too much experience in this sector. I would question whether they are in as good a position as us to audit a bank.’
‘To do a good audit you need a depth of experience. You cannot say you want an auditor who has none of your competitors as clients, but still has a depth of industry knowledge – you cannot have it both ways.’
Unfortunately for PwC, the same sentiment could be applied to the Irish banking market, where the Bank of Ireland and Allied Irish Bank dominate.
After a 30-year relationship with Coopers & Lybrand, Allied Irish announced an audit review. A bank spokesman insisted it was not a result of the merger, but part of a regular retendering process.
Nevertheless, the PwC merger forced AIB to share the same auditor as its rival.
In the early 1990s, the Bank of Ireland faced a similar situation when Coopers & Lybrand, which already worked with AIB, took over Deloittes, then a joint auditor of Allied Irish Bank with Price Waterhouse. PW won the contract in its own right when the Bank of Ireland sought new tenders.
Will Lifford, head of client services at Grant Thornton, said: ‘The sheer size of some of the Big Five firms means their mid-corporate sector clients must be wondering whether they might be better served by a firm that specialises in their sector.’ Lifford said he expected more of the Big Five’s mid-sized clients to seek new, smaller advisers in the next 12 months.
Hughes was adamant the audit contract losses are part of ‘the normal course of business’. Diageo’s review was brought on by the merger of Grand Met and Guinness and in a similar situation with Commercial Union and General Accident, PwC triumphed. ‘We got one and we lost one,’ he said. ‘I would have preferred to have got both, but that’s life.’
Another theory circulating among rival auditors is that some PwC clients will try to exploit the situation by launching reviews to get PwC to freeze or even reduce its fees.
Changing auditors is not something you do overnight. More fall-out will tend to take effect after defecting clients complete their current financial years, which could well run until 30 June. Although ‘business as usual’ is the official line, the months ahead are likely to be intense for PwC’s audit army.
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