Dennis Nally, global chairman of PwC, is a master of dodging tricky questions. Asked about his salary, he looks at his PR man, who quickly steps in to say it is not disclosed. We can presume it was in the millions, as PwC’s UK chairman, Ian Powell, took home £3.7m this year.
“I would say I earn every dollar I make,” says Nally, a fit-looking 59-year-old. It is a bold claim in a climate where executive pay is under scrutiny. But Nally knows all about scrutiny: for three years, the European commission has been investigating the big auditing companies, culminating in recent proposals for a radical overhaul of the industry.
The only surprise is that it has taken so long. The Big Four auditors – PwC, Deloitte, Ernst & Young and KPMG, of which PwC is currently the biggest – work for a staggering 85% of companies on EU stock markets. How can that possibly be a competitive marketplace?
It is a question Nally gets asked “an awful lot”. There used to be eight major firms, he explains, but that was whittled down by consolidation and the spectacular collapse of Arthur Andersen.
Then there is the scope of the auditors. PwC operates in over 150 countries, he says: it takes critical mass and an ability to invest to compete in this market. But surely the same is true of the major banks – and no one would be comfortable with just four banks serving 85% of the stock market? “Absolutely,” he agrees. “And I would tell you there’s no restrictions today; if BDO and Grant Thornton wanted to merge to create another firm, they could.”
So how does he reconcile the fact that it would not be healthy to have just four banks, but it is healthy to have four audit firms? “All I’m saying is there’s no restrictions that allow for more firms to develop the kind of network that is necessary to serve the global capital markets.” That does not answer the question but does bring us to the crux of the matter: don’t small auditors stay small because companies feel obliged to use one of the Big Four?
“I think there is so much competition in our marketplace today,” Nally says forcefully. “This gets back to the quality of the service, the name of the firm, the ability to serve these companies that are very complex. Those are the market forces driving the fact that you really only do have four major firms today.”
Unfortunately, Nally has not convinced the commission. Although it scrapped its most controversial plan – that banks and other large companies must use joint audits – it has proposed plenty of measures the industry will not like, and hopes to make them law next year. Among the least popular are proposals that companies must change audit firms every six years, and that auditors must spin off their consulting and other non-audit work.
Nally resorts to management-speak to register his dissent. New provisions to regulate the audit industry must go through two lenses, he says: “quality and relevance”. “There’s a lot of experience that would say restricting services [doesn't] necessarily enhance audit quality or enhance relevance.” His reasoning? To undertake a world-class audit, you need all sorts of skills, not just those of accountants.
But could that create a conflict of interest? “Look,” says Nally and there is a new edge in his voice. “There could be a conflict of interest on anything. If you are providing advice to a company, then it’s up to them to make a decision as to how they want to use that advice.”
True, but, again, he does not address the key issue: how can auditors give an independent view of a company when they have advised that company on tax issues, or received huge fees from it for other services?
There is another concern about the Big Four: namely, that they are too big to fail. Nally seems to accept this is the case, albeit in a roundabout way. “I’d turn it around. If one of the four firms failed tomorrow, the profession as we know it today would disappear.”
The son of an FBI man, Nally joined PwC in 1974 and admits he never expected to stay so long there. “Run a company, that was always my dream, but over the last 38 years I’ve had a lot of fun doing what I’m doing.” Becoming partner in 1985, he rose through the ranks to head the US operation, and was elected global chairman in 2009.
It has been an interesting time to be at the helm of the world’s biggest auditor. As the markets have come crashing down, company after company in the financial sector has gone down with them – most recently MF Global, the dealer-broker that imploded after a gamble on the European sovereign debt market, leading to the discovery of a $700m (£450m) hole in its customer accounts.
As the company’s auditor, PwC has been in the firing line: it gave MF Global a clean bill of health in May, but there are now growing allegations of lax risk management at the dealer-broker, and of a failure to ringfence customer deposits from the company’s funds.
This is not Nally’s only headache. In November, PwC was in trouble because UK staff had failed to spot that JP Morgan had not ringfenced client funds from the bank’s own accounts. Meanwhile, subprime lender Cattles, which was almost forced into bankruptcy by accounting irregularities, is preparing to claim damages for alleged failings in the way PwC audited its accounts.
Nally does not want to go into specific cases but he will address the criticisms of auditors that arise from these situations. In the case of a company using disingenuous accounting, he blames the rules. “If a company is following acceptable accounting principles and reporting as such, that’s potentially an issue with the standard itself.” With regard to fraud, his response is combative. “If there is a perception that auditors are not doing enough, then the question ultimately turns out to be: who’s going to pay for auditors to do more?”
At which point, it seems fair to ask what auditors are, in fact, paid for. “I think there’s a role of independence, subjectivity that always goes with what we do. The fact that you are having some third party come in and look at the books of a company who are doing the right thing, there’s a benefit that accrues to the investment community to know that is the case.”
He adds that auditors are not only there for companies that do the right thing, but reiterates the fact they should be paid more if they are to spot companies doing the wrong thing. “If somebody is looking for an audit opinion to be 100% surety that there are no issues that can come up, there’s a cost associated with doing that kind of work.”
As with his salary, it is all a question of value for money.