The collapse of Carillion revealed the extent to which the entire system of checks and balances on a public company failed yet again (a far better example were the Too Big to Fail banks).

Carillion is a story of a system that favours profit, dividends and shareholders’ interests over the common good. That system is neoliberalism.

At the top of the list of failures cited by a Parliamentary report were the auditors.

KPMG’s “long and complacent” tenure of “cursory” audits at Carillion was not an isolated failure: it was “symptomatic of a market which works for the members of the oligopoly but fails the wider economy”.

Auditing is referred to as an oligopoly because the big four accounting firms conduct the vast majority of the audits of publicly traded companies.

Frank Field, chairman of the Work and Pensions Committee, added,

Same old story. Same old greed. A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners. They rightly face investigation of their fitness to run a company again.  This is a disgraceful example of how much of our capitalism is allowed to operate, waved through by a cosy club of auditors, conflicted at every turn. Government urgently needs to come to Parliament with radical reforms to our creaking system of corporate accountability. British industry is too important to be left in the hands of the likes of the shysters at the top of Carillion.

The big four accounting firms have numerous conflicts of interest starting with their consulting practices and continuing to their tax advisory services (where they help companies and their executives minimize the taxes they pay).

Rachel Reeves, chairwoman of the Business Committee, observed,

The company’s delusional directors drove Carillion off a cliff and then tried to blame everyone but themselves. Their colossal failure as managers meant they effectively pressed the self-destruct button on the company.

“However, the auditors should also be in the dock for this catastrophic crash. They are guilty of failing to tackle the crisis at Carillion, failing to insist the company paint a true picture of its crippling financial problems. The sorry saga of Carillion is further evidence that the Big Four accountancy firms are prioritising their own profits ahead of good governance at the companies they are supposed to be putting under the microscope.

“KMPG, PwC, Deloitte and EY pocket millions of pounds for their lucrative audit work – even when they fail to warn about corporate disasters like Carillion.  It is a parasitical relationship which sees the auditors prosper,  regardless of what happens to the companies, employees and investors who rely on their scrutiny.

The auditors are only in the dock if they are suppose to be serving stakeholders like investors and suppliers.  If they are, then it is the auditors responsibility to make sure they communicate all the accounting tricks played to make the company’s financial statements look as good as possible.  Stakeholders need to know how aggressive the firm is in its accounting practices.

If auditors only serve management, this needs to be explicit.

One of the challenges faced by the Transparency Label Initiative is not awarding a label simply because a firm’s auditors say its financial statements were assembled in accordance with generally accepted accounting principles and fairly reflects the condition of the business.

I say it is a challenge because some firms’ accounting statements are designed to inform and other firms’ accounting statements are designed to hide.  Carillion is an example of a firm whose accounting statements were designed to mask its true condition.  The same is true today of the opaque, Too Big to Fail banks.  While they are technically compliant with accounting standards, they don’t let investors know what they own.