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Comment by bigbubba | Hacker News Reader

Ernst & Young are one of the 'Big Four' but it used to be one of the 'Big Five' until Enron and Arthur Anderson went down.

Will it soon be the 'Big Three'?

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Probably it should be the "big None" but the people best positioned to do something about it are inherently conflicted.

Three of the Big Four are head-quartered in London†, and so the most likely avenue to better regulate them would begin in Westminster. But Westminster has for many years been in the hands of Tories, who have successfully hoodwinked the British people into believing that somehow all the awful things Tories keep doing would be fixed if only they had more Tories in charge of everything. The Tories pay the Big Four piles of tax payer money, including to "fix" problems caused by other members of the Big Four. For some reason the proposed answer often seems to be "Pay Big Four firms more money" perhaps they could pay a Big Four firm to find out why that is?

† All of the Big Four are organised as Groups, so that a relatively small company - in three cases based in London - handles the global brand, while independent businesses in dozens of countries share that brand, intellectual property and so on. Legally it is possible to pretend these aren't the same firm, although it sure is convenient how easily senior employees move between one of the independent businesses and the others as they wish...

Was the 4th KPMG? They just shifted from a Swiss cooperative to a UK private company like the rest this year.

And the other one was Arthur Andersen, but we all remember what happened to it.

Thanks, I didn't know this happened although apparently KPMG is still not actually headquartered in the UK it is now a UK company.

The establishment of corporate personhood has been a major threat to our society. It doesn't make sense that some abstract entity can have more legal rights than people. If someone commits a crime, they go to jail and so they cannot continue to harm society. On the other hand, if a corporation commits a crime, they get a fine and keep doing what they were doing. There should be a point beyond which people need to go to jail or the corporation shares need to be seized by the government.

There needs to be an incentive for shareholders to dump shares of unethical companies. The government should provide that incentive.

PWC was banned in India due to similar oversights.

https://www.thehindubusinessline.com/info-tech/satyam-scam-s...

The Indian government is also unusually (as far as my impressions take me) dedicated to supporting domestic Indian firms in direct competition with international firms. (It's not clear to me from the article you shared that's what happened, though, just airing a possibility.)

It was the Big Eight for most of the 20th century.

No, soon it will be the 'Big One'... After the other 3 get audited.

Who audits the auditors?

In the US, the PCAOB. It publishes an annual report scoring all of the biggest public accounting firms.

In the Netherlands it's the AFM. It has been very critical of the quality of the audits it has sampled for several years now. However, Dutch courts have placed the onus of proof in establishing that the auditing system at the big-4 is defective in the hands of the supervisor. That's hard to establish via samples.

External accounting has a basic function in society. But when the auditee foots the bill and is also the one to provide information on his / her own (possibly faulty) procedures it's not hard to imagine things going wrong.

Currently the AFM demands higher standards and asks for more budget for oversight in order to be able to look at more cases. Guess who pays for that oversight - the companies already paying an arm and a leg for the audit.

> However, Dutch courts

Not a surprise. If they start to scrutinize accountants' practices, then they'll be expected to place the same scrutiny on lawyers' practices.

The impression from the title is different than what the article actually says--EY missed red flags that resulted in passing the audit when it should have failed, and later scrutiny is what caused the companies to implode.

> and later scrutiny is what caused the companies to implode

Really? If scrutiny is what caused the companies to implode, it seems like there's a strong argument to be made that the problem was the scrutiny.

You want to find problems that are problems whether you find them or not, not problems that are only problems because you called them "problems".

I'm not sure where you got the impression that problems such as $300 million in fabricated sales, or $5 billion in undisclosed debt which were missed in audits is an issue with external scrutiny.

My post is specifically pointing out that the wording makes it sound like EY audited the companies and their findings are what caused the companies to implode, which is what the parent comment seemed to assume, but the article actually says that it was the fact that EY did not find problems during their audits, which were later found, causing companies to implode.

> I'm not sure where you got the impression that problems such as $300 million in fabricated sales, or $5 billion in undisclosed debt which were missed in audits is an issue with external scrutiny.

You don't think these might have caused problems for the company in the absence of external scrutiny?

The story is more interesting, especially in the case of Wirecard.

The FT started questioning Wirecard's accounts years ago, and Wirecard and the German financial services regulator, BaFin responded by... launching legal attacks on the FT, accusing the paper of colluding with short sellers.

The FT kept finding and printing more and more evidence, EY kept giving Wirecard audit cover, and BaFin kept up an aggressive defence... of Wirecard.

Then finally €1.9bn was found to be missing. The various "evidence" provided to EY to "prove" the money was real shouldn't have fooled anyone who had even the most basic grasp of professional auditing. When the shares were in freefall, BaFin finally admitted that perhaps there was a problem.

Then EY's CEO sent a letter to clients in which he said “Many people believe that the fraud at Wirecard should have been detected earlier and we fully understand that. Even though we were successful in uncovering the fraud, we regret that it was not uncovered sooner.”

The part in italics is simply a lie. EY did not uncover the fraud. The FT did. And in fact what finally killed Wirecard was an independent audit by another Big 4 member - KPMG - which was supposed to vindicate Wirecard, but actually found "irregularities" which Wirecard couldn't explain.

So - what to conclude? It's hard to avoid a cynical interpretation - that auditing at this level is basically PR with spreadsheets, intended to reassure investors that everything is fine, and not a serious effort to reveal financial irregularities.

It's not just EY. KPMG, Deloitte, and PWC have all had issues of their own. The underlying problem is that these companies are hired by their clients to provide a clean bill of health, and if they're too thorough they're not hired again. So the incentives are - let's say - heavily aligned against too much stringency.

The FT Wirecard story is well worth a read. The FT is (expensively) paywalled, but some of the reporting is free.

https://www.ft.com/content/284fb1ad-ddc0-45df-a075-0709b3686...

Sound like a movie script. I’ve even got a title in mind: Big Short.

Surely "A Bit Short" would be a better fit ?

(Not quite sure that idiom works in US English so maybe only for some markets ;-)

The other dimension is cost, auditing a business to the point that you could conceivably uncover any fraud is prohibitively expensive, auditors, for better or worse are highly trained and specialized professionals and the hours that they work cost their clients substantially. If you really want a system that prevents all fraud, rather than most, then you’re going to have to accept much higher costs, which given its relative rarity is possibly not worth paying for.

Ah, that's funny, because the way I read the headline, I assumed it was saying that they imploded because of lax auditing by E&Y, which should have caught their problems before they snowballed into too-large-to ignore implosion drivers.

It might've just been me misinterpreting, but I thought the parent comment meant that EY would become the "Big One" after auditing the other companies and causing them to implode

Ah, hahaha I thought that was just a general comment about any of the others being potentially hole-ridden enough that an audit would destroy everyone but the one doing the auditing.

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