PracticeAuditAnalyst warns of run on audit firm

Analyst warns of run on audit firm

Ripples of financial crisis could cause a run on a Big Four auditor, warns analyst

Paul Boyle, FRC chief executive

Domino effect: Paul Boyle

An analyst has warned there could be a run on a Big Four auditor, in one of
the most concerning ripple effects of the financial crisis.

Peter Elwin head of accounting and valuation at Cazenove Equities said that
the hypothetical nightmare scenario could become a reality if the fear in
financial markets led investors to question valuations performed by a particular
audit firm but not those by its competitors.

‘We’re in Andersen territory here,’ said Elwin. ‘We’re in that kind of market
right now.’

At KPMG’s ‘Accounts and Audit: Are they still relevant’ roundtable Elwin
described the events that would be triggered if there was a major scandal in
which auditors were implicated. ‘I can guarantee that I would get calls left
right and centre, and the first of these would be from the hedge funds.

‘They would say, “I want a list of [the audit firm’s] clients” and then, as
long as they weren’t financial stocks, they’d short the pants off the
[clients].’

This could lead to the audit firm going down because those clients would try
to distance themselves from the reputational and financial fallout of being
associated with that firm by dropping them as auditors.

Elwin’s comments came after Paul Boyle warned there could be a global domino
effect if a major accounting scandal broke at a Big Four member firm. The chief
executive of the FRC said: ‘We have gone from the impossible to the inevitable
without stopping at probable.’

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