Like a tedious household repair job, fixing the accounting for Britain’s largest and most important companies is always put off until it’s too late – and then bodged anyway, with often calamitous results. As Covid-era government support for some of the country’s most precariously positioned companies winds down, accounting for their finances remains trapped in this unhealthy pattern. Reforms promised after the 2018 collapse of Carillion, after years of mis-accounting and at a cost to taxpayers of £150m, remain some way off. Those that are proposed by business secretary Kwasi Kwarteng fail to address deep-seated structural flaws. The need for decent accounting could hardly be more critical. A recent study by none other than the “big four” accountancy firm EY found that the pandemic had led to a doubling in the number of listed companies issuing three profit warnings in just 12 months. A third were using government-backed Covid support loans and half were claiming furlough for staff. The end of the government’s financial support schemes will make what should be the core job of firms like EY – auditing – central to corporate Britain’s future. Executives will be anxious to impress the markets with strong balance sheets that can be used to justify the restoration of dividends and boardroom bonuses. But without reliable audits, these figures could be as illusory as Carillion’s were. This will come down to arcane questions about asset valuations, recoverability of debts, future cashflows and much else that ultimately depends on a bean-counter’s judgment. Corporate collapses since the dawn of double-entry bookkeeping, from the Medici banking empire to Enron, the Royal Bank of Scotland and Carillion, prove the eventual consequences of getting these judgments wrong. When financial weakness is not recognised early on, the decisions and payouts that follow can bring down a company before long and send shockwaves through the wider economy. The big four firms that dominate the country’s accounting sector – EY, PwC, KPMG and Deloitte – will have the responsibility of ensuring that subjective accounting assessments are realistic, rather than flattering. Unfortunately recent experience suggests that they’re not up to the job. Last month, the Financial Reporting Council found that over a quarter of audits of FTSE 350 companies required improvement; a slightly worse position than when Carillion’s unreliable figures were being merrily signed off by KPMG a few years ago. The auditing regulator, the FRC, could also point to a groaning caseload of 37 investigations, including the failure of Thomas Cook (audited by KPMG), the London & Capital Finance investment scheme scandal (PwC and EY (and Oliver Clive & Co) and outsourcer Mitie (Deloitte) over “aggressive” accounting. These follow recent fines for disastrous audits such as PwC’s of BHS under Philip Green and Deloitte’s of Serco, as it fiddled government contracts. Against this dismal background, the government has commissioned a string of reviews of the profession and its regulation. The author of the first, the Legal & General chairman John Kingman, proposed a beefed-up regulator but recently complained that, with no legislation for this new body expected until 2023, it will be “nearly five years after my report that the new regulator comes into being”. When it does, it will be policing a new regime based largely on a review of auditing by City grandee Donald Brydon that proposed splitting accountancy firms’ audit and consultancy operations. In endorsing his ideas, however, Kwarteng gave the unambitious game away. Even while acknowledging that the effects of corporate failure “are felt far and wide with job losses and the British taxpayer picking up the tab”, Kwarteng promised no more than “sensible, proportionate reforms” – to the relief of partners at the big four, whose incomes average in the high six figures. Rather than radical overhaul, there will be tweaks such as encouraging smaller firms also to get in on the big corporate auditing gigs, and greater responsibilities for company directors. The plans stop far short, for instance, of reforms introduced in the US demanding more accountability for auditors and company directors in the wake of its turn of the century scandals such as Worldcom and Enron. And even those reforms weren’t enough to avert accounting horror shows such as those that were found on the books of the sub-prime lenders that seeded the 2007-8 crash and destabilised the global economy. The changes, says Kwarteng, “unleash competition in the audit market”. But this betrays the essential fault in the model. Demanding that auditors “compete” for contracts to scrutinise companies’ accounting, while expecting them to be sceptical and occasionally confrontational, is like asking the police to compete for their investigations – with the crook deciding who gets the job. Auditing history is littered with examples of auditors not wanting to challenge a company’s accounting too fiercely – or even colluding with false accounting – in order to keep the client happy. The big firms have largely stopped selling consultancy services to audit clients, and claim that this draws a line under the question of conflicting interests. But a quick game of pass the consultancy parcel has ensured that profits have remained considerable. And the move masks the central issue, which is that the major firms are no longer really accountancy firms. Auditing and related services account for just a quarter of their income; they are consultants with accountancy sidelines. None of the proposed reforms – certainly not a tepid plan to separate management of the two arms – will change that. When Deloitte can earn almost 25 times as much from a single government consultancy contract on the test and trace programme as it receives in a year from a major UK audit client such as the aerospace giant BAE Systems plc, it clearly isn’t the same firm as the one whose founder, William Welch Deloitte, made its name by exposing false accounting in the chaotic early railway industry. Post-pandemic Britain needs sound accounting every bit as much as 19th-century Britain did. The required reforms would involve thinking about what auditing is for and how to make it objective, perhaps by making auditing of the most important companies a public regulatory function, rather than a private one. But don’t expect even the next raft of scandals to bring home the urgency of this unglamorous remedial work. Why act when you can delay? Richard Brooks is a Private Eye journalist and the author of Bean Counters