EDITORIAL: Foxes design another lucrative hen house
There is one problem with the WEF’s ground-breaking proposals on jobs and tax: the accounting firms
January 2020 might not have been the best time for the World Economic Forum (WEF) to launch a report containing proposals for a revamped corporate governance framework. While its detailed recommendations might chill the blood of executives already weary of box-ticking, some will delight the protesters who pitch up at every Davos meeting.
The proposals are designed to enhance the responsible leadership in the system of stakeholder capitalism many corporate and political leaders are now calling for. Much of the report contains the sort of trite analysis contained in many integrated annual reports. But there is also much that advances corporate governance and stands to make a significant contribution to stakeholder capitalism.
What saves the report from being little more than a tedious repeat of much that’s gone before are the proposals relating to jobs and tax. These are little short of revolutionary. Calls for details on the rate of new employee hires and employee turnover reflect the wider “stakeholder” definition now being targeted. But the truly outstanding proposals are those aimed at establishing a company’s “net economic contribution”. Country-by-country tax reporting, reasons for any differences between the tax paid and the tax due, and details of any government subsidies or tax breaks are just some of the ground-breaking proposals.
But it’s not the content of the report that is problematic, the authors are. “Towards Common Metrics and Consistent Reporting of Sustainable Value Creation” is the work of the world’s four largest accounting firms — Deloitte, EY, KPMG and PwC — in collaboration with the WEF.
Its public launch at the WEF’s annual Davos bash coincided with the release of the Luanda Leaks report detailing complex financial schemes that enabled Isabel dos Santos, daughter of Angola’s former president, to become the richest woman in Africa. Dos Santos, who denies any wrongdoing, used the big global accounting firms extensively, with PwC apparently one of her company’s favoured advisers.
A week earlier in SA, Deloitte was forced to again deny allegations that it was involved in state capture at Eskom. The state-owned power producer is taking legal action against the company to recover funds for contracts it says were improperly awarded by its former executives. Meanwhile, Deloitte is also battling to deal with the fallout from accounting irregularities at Steinhoff and Tongaat Hulett.
The controversies dogging the big four extend way beyond the borders of Africa, as was evident from the release of the Brydon review in mid-December. Led by Sir Donald Brydon and backed by the UK government, the review was tasked with devising the reforms needed to rebuild confidence in the audit profession after a series of high-profile corporate collapses. Their extremely well-paying, powerful bank clients also happened to be at the very centre of the global financial crisis in 2008.
One of Brydon’s recommendations dealt with what many regard as a major source of the problems facing the big four firms: auditing is just one of the services that the firms sell. Brydon recommended the creation of a stand-alone audit profession. “Auditing is too important to be left to an adjunct of another profession,” said the review.
In recent decades the provision of non-audit advisory services has become an increasingly important income generator. The executives who sign off on these crucial fees are the same ones who sign off on the audit fees. And by providing so many services, the big four have ensured they are involved in, and hold considerable sway over, almost every aspect of their clients’ operations.
As the authors of the WEF’s latest report calling for more measurement and disclosure of corporate activity, Deloitte, EY, KPMG and PwC are creating enormous opportunities for even more fee-generating advisory work for themselves. After all, who would be better placed to create the necessary metrics and to then monitor them at an individual company level?
For stakeholders this is a chilling prospect. They need only consider that the advisory services on remuneration provided by the big audit firms have been key in rocketing levels of executive pay. This, and their generally grim reputation, makes it difficult not to suspect that the bigger plan is not to improve reporting and measurement but to capture the revamped framework and minimise its impact.