One of the biggest groups of donors in the American elections is the Big Four global accounting firms: Deloitte, PricewaterhouseCoopers (PWC), Ernst & Young (EY) and KPMG.

As a matter of routine, they put big money at stake in every election and have to carefully back the right horse. Congressmen and senators play a major role in policymaking. In exchange for their money, the accounting profession expects favourable decisions and regulations that save them from the bites of the corporate watchdogs, mainly the Securities and Exchange Commission (SEC).

According to some research reports, the Big Four audit the accounting figures of as many as 97 per cent of the US public companies and almost all of the top 100 corporations in the United Kingdom. Audit of accounts is a legal requirement. So much business concentrated in so few companies means all of them rake in riches. The multi-billion-dollar business conducts statutory periodic audits of accounts and provides tax consultancy services that, with the help of knowledge, wisdom and clout enjoyed by these accountancy firms, can pull out any company from its tax mess.

Big money is in the consultancy services that entail risk management, corporate strategy and mergers and acquisitions. The comparatively later source that is gaining popularity is the forensic audit.

‘In addition to the auditor that a company’s shareholders appoint, the PSX should assign a second auditor to conduct a separate audit and hand over its report directly to the exchange’

By putting full faith in the audit, the ordinary man in Pakistan, and perhaps in the rest of the world, forgets that the auditor is human and it is possible to influence his decisions. Besides a company’s board of directors, senior partners of audit firms who sign the audit report are aware in advance of any dividends and appropriation of profit by corporates. The suspicion that such information is traded for cash with interested parties has never been proved in a court of law in Pakistan.

A former chartered accountant, who now runs a top-tier mutual fund in Karachi, believes that in order to ensure the independence of the auditor from the influence of a company’s management and its board, a new clause should be added to the listing regulations at the Pakistan Stock Exchange (PSX). It should stipulate that besides the auditor appointed by the company stockholders, a second auditor ought to be appointed by the exchange who should conduct a separate audit and hand over that report to the PSX.

He said it would ensure audit transparency. With regard to “cost audits” that the Competition Commission of Pakistan (CCP) is clamouring to get re-instated to stem the anti-competitiveness and promote fair trading practices, this man of the accounting world was of the view that cost auditors — mainly for companies in the business of wider public importance such as sugar, cement, fertiliser, wheat flour industries and vegetable ghee/cooking oil — should be appointed by the CCP, not company boards.

Khalid Mirza, member of the Securities and Exchange Commission of Pakistan (SECP) Policy Board, argued against the PSX involvement in the appointment of auditors. He also contested the involvement of the CCP in appointing cost auditors. “There is a fiduciary relationship between the auditor and the shareholders of a company and no third party had the right to infringe upon that,” he said.

But the argument can be carried forward: since the board of directors and the company that prepare the financial statements also appoint and remunerate the auditor, it is difficult to deny that the role, duties and judgment of the auditor may be compromised. Auditors do ‘qualify’ the audit reports of smaller companies that pay a pittance. But there are few, if any, recorded instances of auditors inserting a ‘qualification’ in the audit report of a subsidiary of a multinational corporation that doles out huge sums in audit fees. Multinationals are required to pass on the audit reports to their overseas head offices where nothing less than a clean report is acceptable. If the auditor stands his ground, all that the management has to do is move a special resolution at the annual general meeting to change the auditor.

Mr Mirza said the shareholders are the agent while the board of directors is the principal. In matters like fixing the remuneration of the auditor, the management becomes the agent and the board takes up the position of a principal. The auditor and their audit fee are recommended by the board and approved by the shareholders.

When it was pointed out to him that the minority shareholders (agents) were essentially voiceless and resolutions moved by the management for the appointment of the auditor along with the determination of their remuneration were known to sail through without resistance, he responded that the management would be answerable to the board in such matters.

The auditor’s role came in sharp focus following the 2002 debacle of Enron — the largest US corporation at the time. It caused the demise of Arthur Anderson — one of the Big Five accounting firms at the time. The International Federation of Accountants and the International Standards of Auditing tightened regulations afterwards.

Mr Mirza, who remained SECP chairman in the past, said that he had introduced the rule of five-year rotation of audit firms for Pakistani companies even before the international regulations were tightened post–Enron and Lehman Brothers in order to prevent too cosy relationship between the auditors and their clients. He also imposed the regulation that entailed the appointment of separate auditors for the audit of accounts and all other services, including consultancy, except inseparable taxation.

Published in Dawn, The Business and Finance Weekly, November 2nd, 2020