Accounting - What's the problem? With Chinese Walls like these, who needs a Big Six?

A conflict of interest is one of those odd scenarios which we wouldnterest, but the Big Four don’t see the problem. Meanwhile, Peter Williams is just waiting for the dust to settle. all recognise if we saw it but would probably be hard pressed to define.

Those who see the breakdown of the Big Six into the Big Four as potentially sparking an eruption of conflicts of interest, paint the scenario something like this: if both mergers were allowed to go ahead, a finance director of a multinational company could find himself employing one of the firms as his auditor, another his tax consultant, the third as corporate finance consultants and a fourth on other projects as a management consultancy contract.

This is all fine and dandy except in the following circumstances: the FD falls out with one of his four suppliers. He would like to kick them out and bring in another team. But where does he go? To the next tier down, to a specialist boutique, to a non-accountancy-based firm – such as lawyers for the tax work, or merchant banks for the corporate finance brief. Or does he ask one of his other advisors to double-up? This is an uncomfortable but not an impossible situation.

But imagine instead that a fraud or some other irregularity is discovered which means the organisation has to be investigated by the regulatory authorities. Who will the regulators call on when all of the Big Four firms are already on the multinational’s payroll? The second tier of accounting firms may not have the experience, the expertise, or more likely the sheer capacity to take on the work. But FDs have already demonstrated that they don’t have to wait for a financial disaster to happen or some outside agency before deciding to act to resolve a conflict, or even, a potential conflict of interest.

Just over two years ago, Norweb announced it was replacing its long-standing auditor, Binder Hamlyn with Price Waterhouse in order to avoid conflicts of interest developing with its consultants (and Binder’s parent) Arthur Andersen. It is interesting that Norweb should decide the more fruitful relationship – the one that was worth hanging onto – was that with its consultant rather than its auditor. The fact that PW also undercut Norweb’s #100,000 audit fee was no doubt gratifying as well. The present problem for the merger partners is how to deal with these potential and actual conflicts of interest.

The aim must be to steer a middle course between regulators and clients to maximise the chances of the merger getting the regulatory and commercial green light, while ensuring lost fees, especially the high-glamour, high-profit stuff such as consultancy and corporate finance, does not start to eat into the rationale of the deal. One of the dilemmas which will only intensify if the firms get spliced is how to manage the conflict situations. The trouble is that an apparent conflict of interest can come from any discipline – tax, management consultancy, audit, corporate finance or insolvency. And it can also come from any part of the globe. It seems strange that firms for all their vaunted databases and communications tools sometimes seem to have problems spotting these conflicts of interest. No doubt keeping track of all that filing is no easy task, and one which presumably won’t be easier in the merged entity, especially in the “getting to know each other’s system” integration period.

Problems can also arise when some partners start to jealously guard their patch and their clients from fellow partners. There are two types of conflicts of interest which the FD and the regulator has to watch out for. The first is the “we knew we had done some work but we decided it wasn’t a problem” school of thought. The classic example of this is Coopers & Lybrand which was eventually fined by the ICAEW after accepting the administration of Polly Peck having previously worked for company chief Asil Nadir. The second sort of conflict of interest is the unintentional mistake. In the Maxwell trial, defence lawyers embarrassed KPMG and the Serious Fraud Office by pointing out that a partner had been seconded to lead the SFO investigation despite the fact that some years ago the firm had been brought in by Maxwell company Pergamon to investigate … er … its pension position.

Leaving aside the issue of whether an unknown conflict of interest really is a conflict of interest, the problem, said KPMG, was that their usual trawl to discover any difficulties didn’t work because the file was marked “Pergamon” not “Maxwell”. This explanation – truthful though it no doubt is – may not sound too reassuring. The merged firms will have to try even harder to track down the potential problems.

The firms themselves are protesting that FDs in the real world know that these conflict of interest arguments are being overblown. If there is an obvious conflict then organisations have plenty of other choices. They are suggesting that in, say, the examples of the fraud investigation, or the corporate finance deal, a quoted company may well turn to a niche player – whose partners usually would have fallen out of (as well as out with) the big firms at some point – not as a matter of choice but because no other service provider is “conflicted out”. The firms also argue strongly that they have such superb Chinese Walls that many so-called conflicts could actually be handled internally without any need to look elsewhere.

When the Leeds merged with the Halifax it was trebles all round for KPMG.

A London-based KPMG team helped the Leeds, the best that the KPMG Birmingham office could provide worked with the Halifax and to this day the audit is run out of the KPMG Leeds office. The firm also acted as reporting accountants for Halifax, Alliance & Leicester and the Woolwich. Impenetrable Chinese Walls, happy clients, good corporate finance work. So where’s the problem? It will be interesting to see if the mergers go ahead, and when the fuss has died down, how FDs really react.

Peter Williams is a freelance journalist.