Bean Counters: The Triumph of the Accountants and How They Broke Capitalism
by Richard Brooks (Atlantic, £18.99)
Brooks’ theme is “the demise of sound accounting”. Slipshod work by the ‘Big Four’ companies that dominate the profession – PricewaterhouseCoopers, Ernst & Young, Deloitte, and KPMG – have brought it into disrepute.
The author, an investigative journalist with Private Eye magazine, offers many revealing examples of the obvious going unnoticed.
KPMG offered unqualified endorsement of the finances of British bank HBOS as it went to the wall.
Ernst & Young, which audited the books of Lehman Brothers, was arguably responsible for the crash of 2008: “Without the deceptive accounting in which the bean counters were complicit, Lehman would not have reached the scale that it did or have been full of so much financially toxic waste. It might well have been saved, allowing for an orderly rather than chaotic resolution to the world’s dysfunctional banking system.”
Brooks quotes Judge Donal O’Donovan, who presided over legal action taken here against Ernst & Young for its work on Anglo: “It beggars belief that Ernst & Young signed off on the accounts. How they signed off on the accounts as true and fair is a mystery to me.”
Things become clearer if you accept Brooks’ contention that the Big Four look the other way because they put business relationships before honest accounting. Nowadays they earn more from consultancy – offering advice – than they do from auditing. The consultant who tells it straight risks antagonising the client: no-one likes shelling out money to hear that they’re making a bags of the business.
Deloitte learnt a hard lesson about the dangers of professionalism when the British government sin-binned the company for six months for pointing out gaps in its preparations for Brexit.
Consultancy today is about continuity, not candour, about identifying new areas for co-operation from which fees will flow: consultants offer advice, but also create the demand for it.
With multiple clients the Big Four inevitably find themselves in conflicts of interest. PwC, for instance, worked for Imperial Tobacco as well as the NHS, helping to sell cigarettes while trumpeting its commitment to a healthier Britain.
When it comes to the Big Four “nothing succeeds like failure”, the author says, offering the example of KPMG: “Although – more than any other firm – it missed the devaluation of subprime mortgages that led to a world banking collapse, before long it was brought in by the European Central Bank for a ‘major role in the asset quality review process’ of most of the banks that now needed to be “stress-tested.”
Brooks argues for a break-up of the ‘cartel’. He suggests state oversight of audits of companies and financial institutions that are systemically vital, “too big to fail”, as they used to say.
Reform will be glacially slow in the teeth of determined opposition from corporate behemoths that employ hundreds of thousands of people around the world, make billions in profits, have become ‘entwined’ with the apparatus of state in Britain and the United States – and indeed Ireland – and can deploy armies of lobbyists.
This very engrossing book warns that a likely consequence of a failure to shake up the Big Four – and reform the financial markets – will be another crash.