The House of Lords Economic Affairs Committee has launched an inquiry into the Big Four accounting firms concerning their role in the financial crisis.
PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG will be questioned on the lack of competition within the industry in the UK, and whether excessive fees are being charged.
The inquiry will also focus on the role of the Big Four in auditing banks prior to 2008. In March 2010, a U.S. report concerning the fall of Lehman Brothers highlighted the role of Ernst & Young in Lehmans accounting practices. Using Repo 105 agreements, Lehman exchanged 105% of collateral for 100% cash in short-term loans, hiding debt from investors and regulators by disclosing the transactions as sales, rather than loans.
Such a transaction needed a legal stamp of approval, something that no U.S. firm wished to give Lehman. Instead, British law firm Linklaters provided the approval under British law and Lehman ran the repo transactions through its London office.
Ernst & Young, Lehmans auditor, failed to alert regulators to Lehmans intent, despite a Lehman employee raising concerns about the accounting practices. The Wall Street Journal reported that the whistleblower, Mathew Lee (a 14 year veteran of the firm), was fired weeks after notifying Ernst & Young.
As a result, UK auditors have been keen to show their desire for change within the industry. In a recent letter to the Financial Times regarding proposals from the Institute of Chartered Accountants of England and Wales on how to improve the usefulness of audit after the banking crisis, John Hitchins, a partner at PwC, said: Bank auditors from the six largest audit firms were fully involved in developing the report and supportive of all its recommendations, including the proposal that banks develop summary risk statements which auditors would then give comfort over.
John Griffith-Jones, senior partner at KPMG, has also voiced the need for change within the auditing industry.
The Committee will also look into the conflict of interest between audit and consultancy roles.
Commenting at the launch of the inquiry, Lord MacGregor of Pulham Market, chairman of the Lords Economic Affairs Committee, said: The auditing industry has been dominated by a very small number of players for some time now. We will look at the scope for promoting more competition. Auditing is a very high profile issue following the financial crises and we will seek to establish whether the market dominance by a small number of auditors contributed to a failure to pick up on unsustainable risks being taken on by international banks.