Big Four auditing firms and Deep State: the unholy alliance

The following is an extract from Bean Counters: The Triumph of the Accountants and How They Broke Capitalism, available on Amazon (and on LibGen):
https://www.amazon.it/Bean-Counters-Triumph-Accountants-Capitalism/dp/1786490315

DISASTER MANAGEMENT

In 2008, after a five-year delay, the jet-refuelling scheme on which KPMG’s many-hatted Dr Stone had advised eventually went ahead. It soon became clear that the 27-year Future Strategic Tanker Aircraft contract had lumbered the armed forces with overpriced planes that weren’t even fit for ‘high-threat areas’: something of a drawback in military aircraft. The fiasco prompted one of the National Audit Office’s most damning reports on a major public contract, complete with the ‘not value for money’ black spot. The deal, said the watchdog, had been struck ‘without a sound evaluation of alternative procurement routes to justify why the PFI route offered the best value for money’. 14

Since KPMG’s top PFI man had been in charge, this wasn’t too surprising. In 2010, the outcome was summed up by the chairman of Parliament’s public accounts committee at the time, Sir Edward Leigh. ‘By introducing a private finance element to the deal,’ he concluded, ‘the MoD managed to turn what should have been a relatively straightforward procurement into a bureaucratic nightmare.’ 15

Still, a ‘bureaucratic nightmare’ is a consultant’s dream, and with the taxpayer handing over £10m for ‘finance, tax and accounting advice’, once again the bean counters led by Dr Stone came out on top. Nor did the affair harm the head of the MoD’s PFI unit who had signed off the deal, Nick Prior. By the time the extent of the waste was exposed, he had stepped through the well-oiled revolving door between Whitehall and the PFI industry to be Deloitte’s ‘global head of infrastructure’.
There he rejoices in the role of ‘lead client service partner’ for the Ministry of Defence. 16

Even with PFI and the big accountancy firms’ role in it largely discredited, the scheme remains another gift from the taxpayer that keeps on giving to the bean counters. When hospital trusts saddled with overpriced PFI contracts inevitably ran into trouble after a few years, the Big Four would be back on the scene selling remedies for the ill-effects of their own snake oil. By 2013, the biggest health PFI scheme, a £1.1bn redevelopment at St Bartholomew and Royal London, was eating up £120m a year of the trust’s budget, plunging it into a deficit of around £50m and forcing thousands of job cuts. In came PwC as ‘turnaround’ specialists, even though the same firm had advised the trust on signing the PFI deal in the first place seven years earlier. Back then, even the trust’s chairman had admitted: ‘If this was the private sector, you’d be in jail.
This is what got Enron into trouble. It’s all off the balance sheet. It’s cloud-cuckoo land, Alice in Wonderland stuff.’ 17

Yet not only did PwC go on to earn fees for the remedial financial advice, they then sold the hospital a ‘sustainable operational efficiency and improvement programme’. While the hospital cut thousands of jobs, the firm was shortlisted – without irony – for a Management Consultancies Association award in the ‘performance improvement in the public sector’ category. 18

Across Britain, the bean counters continue to clean up from the financial mess left by PFI bills that will demand payment before doctors’, nurses’, teachers’ and armed forces personnel’s wages for another generation. In 2013, six years after PwC told Peterborough hospital that a £400m PFI scheme was ‘competitive, robust and demonstrate[s] value for money’, the public accounts committee labelled it ‘catastrophic’. By this time PwC was back in there earning £3m a year from telling the trust how to deal with the £45m annual deficit caused by the contract. 19

Up in Northumbria, Deloitte advised the trust running Hexham General Hospital on how to buy itself out of a financially ruinous PFI deal that KPMG had advised it on back in the late 1990s. So expensive had the contract turned out that the trust could pay the PFI company tens of millions of pounds in compensation and still save money. 20

PFI became a huge public sector money-spinner for the Big Fouraccountancy firms and played a key role in ensconcing them in Whitehall. Once inside, they began creating a more enduring legacy. It would go well beyond the bricks and mortar and into the transformation of public services themselves.

UNHEALTHY COMPETITION

A central plank of New Labour’s ‘NHS Plan’, unveiled in 2000 by its second health secretary, Alan Milburn, was ‘choice’ for patients. This meant extending the internal market to external private sector health providers and, in the process, giving a greater role to the management consultants at the heart of the health service.
Although much of the early thinking came from McKinsey and Boston Consulting, the accountancy firms soon became the main drivers of the reforms. Within a couple of years a former consultant at what was now PwC, Adrian Masters, was running the health team in prime minister Tony Blair’s delivery unit, while over at the Department of Health itself, another ex-PwC consultant, Simon Leary, was in charge of strategy. From there they ushered in changes including independence for trusts under ‘foundation’ status; ‘independent sector treatment centres’ run by private companies; and more marketization, pitting one NHS ‘purchaser’ of services against another ‘provider’. The bureaucracy of the pseudo-market quickly became a headache for the health service but a field day for the consultants. Total spending by the NHS on consultants rose from around £10m in 2002 to £600m just four years later. 21

More important than the cost was what the consultants were doing to the service. They were re-engineering the NHS in the same way they did large companies. By 2007, while McKinsey were advising on ‘creating a commissioning market’, PwC had been brought in to set up a framework for ‘contracting and procurement’, with predictably expensive results. ‘Whatever the benefits of the purchaser/provider split,’ a parliamentary committee would report in 2010, ‘it has led to an increase in transaction costs, notably management and administration costs.’ Confidential NHS research showed its administration costs had risen to 14% of its budget, more than double the level before the 1990s reforms. 22

Just as with PFI, the fragmentation of the health service created huge demand for advice from ‘purchasers’ and ‘providers’ unfamiliar with how to contract competitively in a health service built on co-operation. The same consultants who created this inchoate matrix naturally stood ready to help.

Soon after the Department of Health’s ‘Director of Commissioning’ Mark Britnell had produced a ‘framework for securing external support for commissioners’, which included KPMG on a list of firms able to provide this support, he left to take over the health practice of . . . KPMG. He was very quickly joined at the firm by his successor at the health department, Gary Belfield. After the 2010 general election, Britnell was regularly back in Whitehall as an informal adviser on new prime minister David Cameron’s ‘kitchen cabinet’. This inside track allowed Britnell to tell a 2011 conference in New York, in a session titled ‘Reform Revolution’, that ‘the NHS will be shown no mercy and the best time to take advantage will be in the next couple of years’. 23

The cause of the KPMG man’s glee was yet more upheaval. The ‘purchasers’ of healthcare were being broken up into smaller units still, this time groups of local family general practitioners. The ‘clinical commissioning groups’ into which they were corralled, unable to manage complex commercial arrangements and run their practices at the same time, were soon inevitably funnelling more millions into the consultants’ pockets. When NHS England produced a report called Mapping the Market in 2013, KPMG’s Belfield could boast that his firm was advising a quarter of the more than 200 clinical commissioning groups, plus two thirds of the major ‘commissioning support units’ across the country. The other Big Four were similarly enthusiastic.

Deloitte predicted that ‘given the considerable financial pressures facing [clinical commissioning groups] we anticipate that our restructuring and turnaround services will continue to be in demand’. PwC’s 250-strong health team was working with more than one hundred of the groups. 24

The health service that they had broken up and marketized was paying the accountancy firms back handsomely. It promises to continue to do so. KPMG also designs courses for the NHS Leadership Academy to teach senior executives ‘global best practice in healthcare management’. 25

A new generation of health-service leaders learns through the consultants’ eyes, and will surely send more public money their way.

Having positioned themselves as health-market experts, the Big Four now advise on major reorganizations, not always successfully. When, for example, struggling Hinchingbrooke hospital in Cambridgeshire became the first NHS hospital in the UK to hand its services over lock, stock and barrel to a private company in 2011, it relied on PwC confirming that the figures looked fine. The hospital trust would make the required savings and the hedge-fund-controlled Circle Health would get its financial return. Four years later, with the deal proving unviable, Circle pulled out. 26
Just up the road in Cambridge, a £725m deal struck by a clinical commissioning group with a consortium of other health trusts to provide all adult community care in the area collapsed within months because of miscalculations in how much the contract would pay. 27

The advisers this time were Deloitte. 28

Both its and PwC’s work for the NHS continue undisturbed, prompting one former Department of Health clinical director to remark that such firms ‘are unaccountable and can walk away from bad or damaging advice with no consequences’. 29

With no accountability for mistakes, the gravy train steams on. Although NHS spending on consultants halved to around £300m between 2006 and 2010 – thanks to a backlash against New Labour’s consultancy splurge – the coalition government’s reforms doubled it again to £640m by 2014. 30

The result is permanent, destructive revolution. No sooner has one set of changes bedded in, and become less fee-generating, than new upheaval is recommended. It is an essential part of the Big Four’s model. Public sector consulting, like other areas of their business, has to make its contribution to the firms’ targets for fee growth. This means selling ever more advice to clients, including the public sector, which in turn means creating the demand for it.

Disrupt. Cash in. Clean up. Repeat. This is the perpetual consultancy machine of the Big Four. In 2016, less than four years after the last wholesale NHS reforms, PwC’s ex-health minister Alan Milburn took to the airwaves and newspaper columns to plug yet another blueprint for change. This time it was his firm’s plans to merge healthcare and social care. 31

The likely mechanism will be regional bodies much like the ‘accountable care organizations’ run by the Big Four’s private health company clients in the US. It’s a fair bet that, whatever direction the health service takes, it will be big business for the BigFour. Twenty-two years after Milburn accused the management consultants of ‘making a killing’, there is no end in sight to the bloodshed.

AT YOUR SERVICE

David Cameron had come into office in 2010 promising ‘an end to government by management consultant’. And while overall consultancy spending across Whitehall did fall during his time as prime minister – largely through reductions in spending on wasteful IT projects – the Big Four still prospered.

The parliamentary committee that was looking into their tax avoidance activities asked, out of interest, how much the firms were earning from the taxpayer. In 2011/12, it emerged, they had earned £490m (around 6% of their UK income) from the taxpayer. Two years later, with the accountancy firms having found their way round a new government and the fragmentation of the health service providing opportunity aplenty, this had risen by more than 50%. PwC doubled its public sector income to £333m. As public spending was slashed everywhere else in austerity Britain, the taxpayer cash lavished on PwC continued to grow as fast as the queues at the nation’s food banks. In 2015/16 it hit £440m. 32

The consultants’ overwhelming financial incentive when advising government is to tell it what it wants to hear, untrammelled by the more objective traditions of the civil service. The consultants don’t have the heritage of ‘speaking truth to power’ instilled in the civil service in the nineteenth century. Financially motivated, they can be kept to heel more easily. When a Deloitte memo pointing out gaps in the government’s Brexit preparations was leaked in 2017, the firm was put in the public sector contract sin bin for six months. Causing political embarrassment warrants stiff punishment – unlike real public service cock-ups – and the message to the Big Four is clear: don’t upset the government paymaster.

This unspoken understanding goes a long way to explaining why an ‘independent’ financial endorsement from a Big Four firm will be found behind most politically driven government-sponsored projects. The 2012 Olympic Games was one example. When a London bid had been contemplated ten years before, it had gone ahead only on the basis of its modest price. Early estimates,produced by PwC with supposedly 80% certainty, were that the public cost of the games would be up to £2.1bn. Since this could be met by lottery players and London council taxpayers without raiding central government coffers, a sceptical Chancellor of the Exchequer was won round. ‘Gordon [Brown] was absolutely clear,’ recalled the then sports and culture minister Tessa Jowell. ‘He knew what the forecasts for the economy were and knew we would not be in a position to put huge amounts of government money into it.’ 33

A few months before the bid was made for the games in 2004, the costs rose to £4.5bn. Again, said PwC, there was an 80% chance of them coming in within 10% of this. Then the price escalated even more dramatically. By the time the budget was finalized, the public cost had hit £9.3bn. 34

If PwC’s experts had looked at previous Olympics bids, they would have realized that their early optimism was always wildly misplaced (and ‘optimism bias’ in public projects was one of the adjustments they used liberally to justify PFI schemes). The value of the ‘independent’ bean counters, however, was that they would look at what their paymasters considered convenient. Visions of Jessica Ennis and Mo Farah atop the podium may now shroud the Olympic financial fiasco in happy sporting imagery. Other bean counter-justified plans, however, are unlikely to be remembered so warmly.

One of the most critical problems facing Britain today is how to reinvigorate a largely post-industrial north. It’s a huge challenge, requiring well-crafted but not individually transformational investments in industry, education, technology and local transport networks. But in Westminster politics, this isn’t sexy enough. So at least £50bn is instead to be invested in a single high-speed rail link between London and Birmingham and from there on to Manchester and Leeds. To justify ‘HS2’, in the face of loud public and parliamentary opposition, in 2013 the government took the now standard step of commissioning an ‘independent’ report from one of the Big Four accountancy firms.

 Unsurprisingly, KPMG concluded that the new link would generate major economic benefits, to the tune of £15bn a year. A few months later, greatly helped by the claim, the scheme was voted through Parliament. 

Among those without a political or commercial interest in HS2 going ahead, the KPMG report met with criticism verging on ridicule. The BBC’s then economics editor Robert Peston blogged that ‘some would say [there] is a flaw the size of Greater Manchester in its analysis – because KPMG is ignoring one of the fundamental causes of lacklustre growth in many parts of the UK, which is a shortage of skilled labour and of easily and readily developable land’. 35 

When a committee of MPs came to examine the report, academics lined up to rubbish it. ‘I don’t think the statistical work is reliable,’ said a professor of statistical modelling at Imperial College, London. ‘They [KPMG] apply this procedure which is essentially made up, which provides them with an estimate,’ added a professor of economic geography from the London School of Economics. ‘It is something that really shouldn’t be done in a situation where we are trying to inform public debate using statistical analysis.’ 36

Noting that HS2 ‘stands or falls on this piece of work’, the committee’s acerbic chairman Andrew Tyrie summoned the report’s authors. 37 

One exchange with KPMG’s Lewis Atter (a former Treasury civil servant) spoke volumes for the bean counters’ role in lumbering the taxpayer with monolithic projects:

Tyrie: It [the £15bn a year economic projection] is a reasonable forecast of

what we might hope to get from this project?

Atter: We believe so.

Tyrie: The reason I use the word ‘forecast’ is that I note that in several places

you caution that a key part of your analysis is, and I quote, ‘prepared for

illustrative purposes only and does not constitute a forecast’, and a moment

ago you told me that this considered estimate is a forecast.

Atter: It is a considered estimate.

Tyrie: But it is no longer a forecast?

Atter: I think it is clearly a forecast.

Tyrie: Even though you are making clear that it does not constitute a forecast in

your own report.

Atter: No, I think you are looking at our standard disclaimer.

Tyrie: This is a standard disclaimer?

Atter: Yes.

Tyrie: So if you are forecasting that tomorrow the sun will rise, you will

nonetheless put a disclaimer on and say that is only a projection?

Atter: I think the conversation with Risk and Compliance might be a little more

straightforward, in that case, but yes.straightforward, in that case, but yes.

Tyrie: This is to stop you being sued?

Atter: Correct.

KPMG had, in other words, produced some numbers that its client could call a forecast for political purposes without actually making a forecast. It could say anything it liked, demand a nice fee (£200,000 in this case) and abrogate responsibility. Three years later, with KPMG now earning even larger fees from the project itself on the back of its own forecast (or maybe non-forecast), and with one of its directors having become HS2’s programme director, Andrew Tyrie alerted a new transport secretary to the shaky foundations. ‘HS2 has the weakest economic case of all the projects within the [government’s] infrastructure programme,’ he wrote, ‘yet it is being pursued with the most enthusiasm.’ 38

In 2017, the first contracts for constructing HS2 were signed. By this time, a senior figure had been appointed by the publicly owned company delivering the project, HS2 Ltd, to ensure the taxpayer’s money would be well spent. Sue Kershaw described her role on the £50bn-plus deal as being ‘effectively the eyes and ears of government within the project’. 39

Remarkably, she was a director at KPMG. Such is the power, without accountability, of the bean counters.


SHADOW STATE


With their ‘can do’ attitude – often when the correct advice would be ‘don’t do’ – it’s no surprise that consultants and bean counters from the Big Four are preferred to sceptical civil servants. All the firms accordingly have active practices in every area of public policy, with expertise in everything from health to education, transport to housing, criminal justice to social justice, defence to international development. Using the insights of former officials, they can mimic the machinery of government. EY’s tax policy team, run by a former Treasury special adviser, boasts of ‘developing technical policy options in a form used inside government... This ensures proposals can be implemented with the minimum of delay... and have the maximum chance of adoption.’ 40

The Big Four thus play the role of shadow civil services without the corresponding constitutional or operational responsibilities.

Whereas Whitehall has to deal not just with policy but with all the drudgery of the state – the administration, the scrutiny, and clearing up the mess when things go wrong – the Big Four can simply lap up the cream, charging rates that would cause uproar if paid to civil servants. This gives them the resources to assert influence in important ways. Countless studies by the Big Four present the world as they see it and showcase the expertise that they can then sell to create it. The practice was pioneered to great effect by management consultants in the States in the 1970s, and is now packaged as ‘thought leadership’. At the time of writing, PwC’s healthcare website advertises reports on various hot topics, among them ‘Road to recovery: addressing NHS financial challenges’ and ‘The role of hospital chains in the future NHS’. KPMG’s defence page has its ‘Global aerospace and defense [sic] outlook’, while its international development site has a ‘Sustainable development goals matrix’ through which it parades its understanding of the developing world.

If these are the firms’ brochures, then conferences and hospitality for ministers and officials are the sales events. When, after much resistance, I forced the Cabinet Office to reveal details of hospitality provided to the most senior board-level civil servants, it emerged that in 2007, the Big Four accountancy firms had entertained them – usually to lunch or dinner – on 104 separate occasions. KPMG had treated the permanent secretaries (the most senior mandarins) at the business department, the Home Office and the Cabinet Office each to a day at the Chelsea Flower Show. 41

Other top civil servants went to the opera, sports events and art exhibitions with the bean counters. The junketing has been greatly curtailed after the revelations brought damaging publicity and forced the publication of hospitality registers, but the closeness remains. At the very top of government, the leaders of the big firms have long been valued companions on overseas trade promotion tours and prime ministerial business councils. Ernst &Young’s UK chairman, Steve Varley, beamed in one interview in 2016: ‘I’ve been lucky to go to 10 Downing Street many times over the last few years. It’s a real privilege to be in this role, in this job and at the heart of our country’s government.’ 42

The Big Four’s deep pockets pay for other routes into Whitehall. Ernst & Young, for example, sponsors the annual Civil Service Awards (none of whichhas yet been given for plans to reduce reliance on consultants). KPMG, meanwhile, sponsors the annual Civil Service Live conference, complete with a challenge to ‘reimagine’ services. The deal complements a contract to deliver training to all 400,000 civil servants (on KPMG’s possibly exaggerated estimation) on ‘topics as diverse as leadership and management, customer service, finance and policy’, using ‘technology and intellectual capital at KPMG’. 43

Regular secondments into government further align Big Four and official thinking. A 2013 report by lobbying watchdog Spinwatch found that at least fifty people had been seconded to government departments by the Big Four firms in three years. 44

Most were in the Cabinet Office, the Treasury and the Department for Business, the centres of power where policies governing everything from corporate taxes and financial markets to industry and the shape of public services themselves are determined. Other bean counters from PwC were providing free assistance to several of the Labour Party opposition teams (until Jeremy Corbyn’s less consultant-friendly regime brought the arrangement to a close).

ARMED CONFLICT

When formulating their advice, whether as secondees into government, across a restaurant table or through a formal contract, the major accountancy firms are fundamentally conflicted. Certain outcomes – fragmenting services, outsourcing others, expensive procurement – provide them with their future paydays. Other more economical and effective incremental changes – never mind the status quo – do not. There’s no money in stability. The companies that benefit from the consultants’ advice to government bodies by providing the duly outsourced services certainly appreciate the importance of the Big Four.

The former lead UK partners of Deloitte (John Connolly) and PwC (Sir Ian Powell) are now chairmen of two of the largest outsourced public service providers, G4S and Capita respectively. When the latter announced its catch in 2016, it was struggling with badly performing public service contracts and a tumbling share price. Powell, it reassured shareholders, had ‘led PwC’s interactions with the UK government and other public sector organizations’. 45

His contacts both in Whitehall and in the accountancy firm advising it clearly made him the man to have at the helm.

While advising government, the Big Four firms will invariably also be acting for others interested in their advice: not the citizens who depend on the services in question, or the people who deliver them, but the large corporations who form the bean counters’ core clientele. The danger is twofold. Firstly, advice to government that benefits these companies is likely to lead to more work for the consultants in future. And secondly, the ongoing closeness to corporate clients with vested interests in the relevant services is bound to skew the consultants’ thinking. In 2014, KPMG proudly reported two developments.

It had ‘secured strong client wins, including working with Lockheed Martin [the world’s largest weapons maker]’, announced consultancy partner Richard Gosling. He then added that a ‘standout area of growth for us in the year was our government work, particularly defence, where we are of strategic importance to the Ministry of Defence’. 46

The obvious, and some might think fatal, conflict of interests went unmentioned. Lockheed, incidentally, would win major MoD contracts the following year. Acting for government and business can even constitute a form of policy insider-trading. EY, for example, is unabashed about how its work advising government ‘gives us the insight and experience to help our clients maximize competitiveness’. 47

Perhaps the MoD didn’t notice, or care about, such conflicts while it paid the strategically important KPMG £70m over a couple of years. Nor did the health ministers and NHS managers pouring millions into KPMG’s pockets seem to mind that another of the firm’s ‘strong [consultancy] client wins’ was Imperial Tobacco. The evidence shows that the government will employ the Big Four even when the most unobservant official might be expected to spot the conflicting interests. In 2009, the Treasury brought in Deloitte to review whether companies were using Britain’s tax havens for tax avoidance (conclusion: not too much to worry about). The same firm had not so long before been pushing major tax schemes through the territories and, bizarrely, had advised the Inland Revenue to sell 650 of its tax offices to Bermuda under a PFI deal so that the company involved could avoid capital gains tax. 48

New challenges bring new opportunities for government to enlist the bean counters’ dependably flexible support. With the country’s exit from the European Union certain to dominate economic policy for years, they are on the front line of the debate. A couple of months before the June 2016 referendum, prime minister David Cameron appeared at PwC’s London office to unveil the firm’s ‘independent’, eye-watering estimates of the cost of leaving the EU.

Once the vote had been lost and Cameron’s successor Theresa May adopted a hard Brexit line, the firm produced a more helpful report. ‘The UK could grow faster than most other large EU countries in the long run, despite the medium-term drag from Brexit,’ it now said. The report was seized on by the ‘Brexiteers’. 49

KPMG, also a strong ‘remain’ supporter before the vote, was soon affecting optimism too. ‘Our country’s spirit of entrepreneurialism, mastery of technology and renowned business environment all point to a long-term collective ability to rebuild our economy after Brexit,’ wrote the firm’s ‘head of Brexit’. 50

As Deloitte’s ban from public sector contracts not long before over its unhelpful memo on Brexit had shown, keeping on the right side politically is a shrewd commercial move.

While their main Brexit-era task is to advise their multinational clients on the upheaval, the Big Four are also helping an ill-prepared government machinery on this one. Secondees from all the Big Four have made their way into the Department for Exiting the EU. ‘As with all crises,’ KPMG’s senior partner Simon Collins had mused a couple of days after the vote, ‘there will be opportunities for professional services firms.’ 51

NUCLEAR CON-FUSION
The greatest long-term policy challenge – addressing energy needs in the age of global warming – is also providing one of the greatest consultancy paydays.

When, in 2013, the British government made yet another controversial investment decision with far-reaching consequences – this time to build the first nuclear power station in Britain for three decades, at Hinkley Point in Somerset – the advice of KPMG was again central. A previous government had been won round to the idea of a new generation of nuclear plants five years earlier, thanks largely to the efforts of Dr Tim Stone, head of infrastructure at KPMG. As well as running the accountancy firm’s major projects practice, covering such matters as nuclear power station construction, Stone had been chair of the government’s office for nuclear development from 2007. The following year it had decided that new plants could indeed be affordably built and, ahead of making the Hinkley Point decision, had again been advised by KPMG’s consultants.

The new power station would depend on promising the French/Chinese consortium building and running it a minimum price for its output. To determine how much this should be, the energy department brought in the KPMG bean counters and paid them a couple of million pounds over two years.

The outcome was a deal that will cost more than twice the current electricity price (plus inflation) for thirty-five years. It will also commit the taxpayer to underwriting the consortium’s debts and, above a certain amount, the costs of dealing with the waste from what most nuclear experts consider an overpriced project based on flawed, out-of-date technology. 52

Once the financial terms were agreed, the civil servant responsible for nuclear energy advice to government ministers, Simon Virley, left the government on a five-year ‘career break’ to become ‘head of power and utilities’ at none other than KPMG. The firm pronounced itself ‘delighted’ with its new man, trumpeting his experience with ‘overall responsibility for advice to the UK Government on renewables, nuclear, oil and gas, shale, carbon capture and storage, and UK energy security issues’. 53

Needless to say, KPMG has a long roster of corporate clients in these areas, including the French company behind the Hinkley Point deal, EDF, and others that are standing by to capitalize on any nuclear building renaissance that it might mark.

The Big Four firms can win such vast consultancy contracts, and sway major government decisions, precisely because of their size and all-encompassing ‘professional services’ proposition. No sooner had KPMG successfully advised the British government on a suitable price for the Hinkley Point C deal than it was pitching for a large contract to advise on the ‘final investment decision’ phase – effectively deciding whether its own previous advice gave a good deal. Its bid stressed that it was the government’s ‘incumbent financial adviser’ and could offer a ‘seamless transition as opposed to bringing a new adviser up to speed’. It had ‘worked very closely to date with [an unnamed official] as part of our current work on [Hinkley Point C]’ and had ‘advised on over 400 infrastructure programmes’. KPMG could offer ‘the full spectrum of accounting, tax and major projects advisory skills’, plus a special ‘competition economics team’ to address thorny European ‘state aid’ questions.

The Big Four’s size, their entrenched position in Whitehall and the sprawling range of their services, in other words, give them an unassailable edge in winning public contracts.

On the back of their accounting heritage, the Big Four have become one-stop consultancy shops. Outsourcing large areas of public policy analysis and decision-making to them becomes an easy decision for governments. It may be far easier than building an objective, competent civil service, but it is corrosive of good government and over time compounds the dependency on the consultants. Despite the omniscience of which KPMG could brag in its contract bids, in 2017 Sir Amyas Morse, the normally restrained head of the National Audit Office, called the Hinkley Point C deal ‘high cost and risky’. He pointed out that ‘less favourable, but reasonable, assumptions about future fossil fuel prices, renewable costs and follow-on nuclear projects would have meant the deal was not value for money’. 54

The next generation of electricity consumers will pay a high price for KPMG’s capture of government nuclear policy.



REVOLVING DOOR


The routine exchange of senior personnel, typified by Simon Virley’s move from civil service director to KPMG consultant on the same patch, brings a closeness that breeds a uniform, market-oriented view of the public realm within Whitehall. So frequently and smoothly does the revolving door spin that it creates a realistic hope among ministers and mandarins that, subject to keeping them happy, the Big Four firms will present later career opportunities or some consulting fees to supplement their pensions. Taken with the closeness between those who have stepped through the revolving door and their former colleagues, the effect is to melt away the healthy tension that should exist between government and commercial interests. The riches on offer are generally kept secret, but the odd glimpse shows how attractive the well-connected can be to the Big Four. When former international development secretary Andrew Mitchell took a consultancy position with EY in 2016, as a serving MP he had to declare that the firm was paying him £30,000 a year for five days’ work. For a possible £6,000 a day it’s worth keeping in with the Big Four, especially in the later, most influential, years of a public sector career.


Below is a small sample of the most senior officials and ministers who have left to find a nice payday among the bean counters.

REGULATION ISSUE

If the bean counters get a good deal from Whitehall, it’s nothing next to their treatment from the regulators that they have also captured.

By the time the world needed to respond to the early-twentieth-century crisis of accounting epitomized by Enron and WorldCom, Britain’s NewLabour government was in thrall to the bean counters-turned-consultants now strolling the corridors of power reforming public services. When the accountants lobbied, the government listened. A 1997 New Labour manifesto commitment to more independent regulation of the accountancy profession was soon dropped. ‘Light touch’ regulation became a selling point for ‘UK plc’. Set up your companies here or list on our stock exchanges, was the message, and we won’t probe your accounts or those who audit them too closely.

Britain’s public accountancy regulator, the Financial Reporting Council, was set up in 1990 in the wake of the 1980s scandals like Barlow Clowes, but had soon become the vehicle for this indulgence. While the accountancy profession largely self-regulates through its chartered institutes and associations, the FRC is supposed to examine disciplinary cases of serious public interest. But its priorities appear to lie elsewhere. Its chairman, Sir Win Bischoff, is a banker who lobbied against tighter controls on the Big Four in the wake of the 2008 financial crisis, while its chief executive since 2009 has been non-boat-rocking former civil servant and insurance industry lobbyist Stephen Haddrill. Two of its other three executive directors, covering ‘corporate governance and reporting’ and ‘audit’, are accountants from KPMG and PwC, while Big Four veterans chair other committees supporting their work. 55

More important perhaps is the regulator’s lack of firepower. In 2016/17, the FRC’s total budget was £33m, and it spent just £4m on ‘enforcement’. 56

Even after a recent recruitment drive, its enforcement division contains just 30 staff (mostly lawyers and forensic accountants). 57

Towards the end of 2017, it had only 24 cases under investigation, covering almost a decade of widespread accounting malpractice. It routinely turned down high-value apparent accounting failures for investigation as not meeting the FRC’s ‘public interest’ threshold. Yet when I talked to Stephen Haddrill in 2017, he told me that he did not consider his organization’s enforcement effort to be under-resourced. It didn’t seem the most ambitious stance for an enforcer. It did, though, match the FRC’s response to the 2008 financial crisis, which had amounted to investigating just one major banking failure – and then only after Parliament had forced it to. 58

Even when the regulator achieves some success, it doesn’t capitalize on it. In 2017, the FRC fined PwC £5.1m for misconduct in the audit of RSM Tenon, a dubious accountancy company that had gone bust four years earlier. Yet rather than retaining the funds to seriously bolster its investigatory efforts – perhaps by recruiting more forensic accountants – the regulator handed the millions to the bean counters’ own professional body, the Institute of Chartered Accountants in England and Wales (ICAEW), ‘in recognition of their funding of FRC cases’. 59

The ICAEW then set about spending the money on training, which they should have been doing anyway.

Paying for investigations into their own conduct and receiving the income from any fines, the bean counters enjoy one of the cosiest disciplinary systems around. Even following a review of the FRC’s powers in 2017 after mounting criticism, recommending potential fines of £10m or more in the most serious cases, penalties for substandard auditing remain minor business costs for multi-billion-pound-earning firms. 60

Successive governments remain unmoved by calls for real reform, even when – perhaps especially when – the accounting scandals mount. The bean counters have become too important, too few and too close to power to be confronted in any meaningful way – even when they overlook the most egregious financial scandal.

Notes:

14. ‘Delivering the Multi-role Tanker Aircraft Capability’, National Audit Office, 30 March 2010.

15. BBC report, 30 March 2010, http://news.bbc.co.uk/1/hi/uk/8593788.stm.

16. Nick Prior, LinkedIn profile, accessed 16 September 2016.

17. Reported in Andrew Hankinson, ‘NHS Boss Dubs PFI “Alice in Wonderland stuff”’, Construction News, 22 September 2005, and in Private Eye magazine, issue 1200, December 2007.

18. https://www.mca.org.uk/library/documents/PI_Pub_-_PwC_with_Barts_NHS.pdf.

19. Public Accounts Committee report, Hinchingbrooke Health Care NHS Trust, Peterborough and Stamford Hospitals NHS Foundation Trust, 7 February 2013. The background to the 2007 signing of the contract given in report by Caroline Molloy on Open Democracy website, 19 September 2013, https://www.opendemocracy.net/ournhs/caroline-molloy/peterborough-hospital-nhs-and-britains-privatisation-racket; accessed 18 September 2016.

20. Gill Plumber and Sarah Neville, ‘NHS Trust Becomes First to Buy out its PFI Contract’, Financial Times, 1 October 2014.

21. Central Government’s Use of Consultants, report by National Audit Office, 15 December 2006. Afurther £125m was paid to them by the Department of Health centrally.

22. House of Commons Health Select Committee, 4th report, 2009/10 session, Commissioning.

23. Tamasin Cave, ‘The NHS will be Shown no Mercy Says Cameron Health Adviser’, Spinwatch, 9 May 2011, http://www.spinwatch.org/index.php/issues/lobbying/item/5343-the-nhs-will-be-shown-no-mercy-says-cameron-health-adviser.

24. Mapping the Market: Commissioning Support Services, NHS England and Cogora, 2013.

25. From NHS Leadership Academy prospectus, http://www.mbs.ac.uk/executive-education/_assets/pdf/nhs-leadership-academy-prospectus.pdf; accessed 9 March 2017.

26. Public Accounts Committee Report, Hinchingbrooke Health Care NHS Trust, Peterborough and Stamford Hospitals NHS Foundation Trust, 7 February 2013.

27. Public Accounts Committee Report, Unitingcare Partnership Contract, 16 November 2016.

28. NHS England review of Uniting Care contract, April 2016.

29. David Oliver, ‘Stop Wasting Taxpayers’ Money on Management Consultancy for the NHS’, British Medical Journal, 10 December 2014.

30. Ibid.

31. Redrawing the Health and Social Care Architecture, PwC, 3 November 2016. See also ‘Health structures complex and confused’, BBC News, 3 November 2016,http://www.bbc.co.uk/news/health-37846112.

32. Public Accounts Committee report, 15 April 2013, Tax Avoidance: the Role of the Large Accountancy Firms. In 2011/12, PwC earned £162m; Deloitte £159m; KPMG £94.5m and EY £72.6m. In 2013/14, the figures for the three firms that gave data were: PwC £333m; Deloitte £179m; KPMG £140m.

33. Quoted in Mike Lee, The Race for the 2012 Olympics: the Inside Story of How We Won the Bid, Virgin Books Ltd, 2006.

34. National Audit office report, The Budget for the 2012 Olympic and Paralympic Games, 20 July 2007, and Guardian datablog: ‘London Olympics 2012 – where does the money come from and where is it being spent’, https://www.theguardian.com/sport/datablog/2012/jul/26/london-2012-olympics-money#data.

35. Robert Peston, ‘What KPMG Ignored When Arguing for HS2’, 11 September 2013,http://www.bbc.co.uk/news/business-24047047; accessed 27 September 2016.

36. House of Commons Treasury Select Committee hearing, 5 November 2013.

37. Ibid.

38. Andrew Tyrie letter to Transport Secretary Chris Grayling, 14 September 2016. Stuart Westgate joined High Speed Two (HS2) Ltd from KPMG in February 2015; government announcment at
https://www.gov.uk/government/news/stuart-westgate-joins-hs2-delivery-team.

39. Sue Kershaw was appointed November 2016. Her LinkedIn profile says: ‘Responsible to the DfT Secretary of State for assuring HS2, the UK’s new north–south high-speed rail line, is delivered to time and budget and of the quality the end user will expect, and most importantly that value is evidenced for expenditure of the public purse. This role is effectively the eyes and ears of
government within the project. I lead a diverse team of talented, “best in class” specialists that provides insight and assurance across all aspects of the project, and works in genuine collaboration with the project’s teams, the Department and Network Rail.’ See https://www.linkedin.com/in/sue-kershaw-0249262/?ppe=1; accessed 21 July 2017.

40. EY International Trade, Economics and Policy Unit, biography of tax specialist Chris Sanger,
http://www.ey.com/uk/en/issues/business-environment/ey-international-trade-economics-and-policy-unit#section4; accessed 18 October 2017.

41. Full data for 2007 available at
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/61353/guide-hospitality-received-by-deptal-board-members.pdf; accessed 27 September 2016.

42. ‘EY Partner Stories’, an Ernst & Young video available on YouTube,
https://www.youtube.com/watch?v=feTrncnAVEc; accessed 2 October 2016.

43. Described in KPMG ‘Client Stories’, https://www.kpmgcareers.co.uk/graduates/client-stories/civil-service-learning-csl; accessed 26 August 2017.

44. ‘Who Really Runs This Place?’, Spinwatch, April 2013.

45. Capita press release, 4 July 2016, http://www.capita.com/news/news/2016/capita-plc-appoints-ian-powell-as-chairman-designate/.

46. KPMG LLP annual report 2014, p.39.

47. EY International Trade, Economics and Policy Unit, section policy,
http://www.ey.com/uk/en/issues/business-environment/ey-international-trade-economics-and-policy-unit#section4; accessed 18 October 2017.

48. PFI: The STEPS Deal, House of Commons Public Accounts Committee report, 6 April 2005.

49. The Long View – How Will the Global Economic Order Change by 2050?, PwC, 7 February 2017. An example of its use by Brexit supporters was on Radio 4 Any Questions on 24 June 2017. Darren Grimes, campaigner and deputy editor of BrexitCentral website, said: ‘PwC put forward a report.

It’s all in . . . Brexit Central’s “reasons to be upbeat about Brexit”. Until 2050 we will be the fastest-growing economy in the G7 according to PwC. The entire Project Fear argument has come crashing down . . .’

50. ‘Entrepreneurship, technology and economic openness could help offset Brexit vulnerabilities’, comments by KPMG head of Brexit Karen Briggs, 19 July 2017.

51. Harriet Agnew, ‘Consultants and Lawyers Brace for Brexit Boom’, Financial Times, 26 June 2016.

52, See, for example, ‘When the Facts Change . . . Hinkley Point Would Tie Britain into an Energy System that is Already out of Date’, Economist, 6 April 2016, quoting Professor Michael Grubb of University College London describing Hinkley as’big and based on last-century technology, which is not what the UK’s power system needs for the future’.

53. ‘KPMG Strengthens Energy Practice with the Appointment of Simon Virley from DECC’, KPMG press notice, 2 February 2015.

54. Hinkley Point C, report by the National Audit Office, 23 June 2017.

55. Sir Win Bischoff is former chief executive of Citigroup Europe and Lloyds Banking Group. In 2011, when chair of lobbying group CityUK, he wrote to the government protesting against EU plans to prevent auditors from performing consultancy work. Stephen Haddrill is formerly of the Department of Trade and Industry. The FRC directors from KPMG and PwC are Paul George and Melanie McLaren.

56. FRC annual report 2016/17.

57. Information supplied by FRC to author, October 2017. The 30 staff were: 13 lawyers, 11 forensic accountants, 5 support staff, 1 PA. The FRC’s budget in 2017, for all its work going beyond investigations into standard-setting and similar duties covering the actuarial profession, was £36m.

58. Details of board members and figures available from FRC website,
https://www.frc.org.uk/Home.aspx.

59. Explained to author by FRC in email, 18 September 2017.

60. Independent Review of Financial Reporting Council Sanctions, 21 November 2017.