Being on an informal and unannounced sabbatical here, I took the old-school approach of a letter to the editor in reaction to the important news out of Hong Kong on August 26 – in the Financial Times here.

The FT saw fit to run my letter in its print edition of September 4 – which reaches only a fraction of its subscribers, most of whom access their news online. 

Expanded treatment is called for – to come. For now, here’s my summary as published:

Big Four networks face greatest threat since Arthur Andersen

The Hong Kong court’s decision (“Evergrande’s $8.5bn claim against PWC poses questions for Big Four”, August 28) to allow the liquidators of China Evergrande to pursue PwC’s international umbrella organisation, along with its Chinese and Hong Kong companies, presents the greatest threat to the Big Four networks since the disintegration of Arthur Andersen in 2002 under its unbearable litigation exposure following the collapse of Enron. 

Early commentary has left two major issues. First, while PwC faces exposure of its complex international structure — designed to ringfence local liabilities while proclaiming itself a single source of multinational service — the scale of its China operations, both China-based clients and those doing business there, means that whether or not the umbrella entity is formally retained as a party, PwC cannot abandon its practices there without fatally harming the integrity of its global network. 

Accordingly, PwC’s litigation exposure will test its resources both globally and locally. The eventual outcome will be measured in the billions — the number to grow with the passage of time — against well-funded liquidators capable of staying the course. Reference to PwC’s in-house insurance is interesting but not relevant, as such facilities essentially represent timing differences on the shifting of past and future partner profits.

Which exposes the second issue: while PwC has capacity to withstand an outcome in the mid-billions, there are limits. A truly “worst case” outcome would be an Andersen-like disintegration. 

That in turn would present an existential crisis for the global delivery of audits. Nobody seriously argues that a Big Three model is sustainable, as the rules on independence and conflicts already severely restrict auditor choice. Collapse of the Big Audit model would require a years-long effort to redesign an assurance function out of the wreckage that would be fit for future purpose.

Costly and painful as it may be for PwC, the strategy of an early and least-cost settlement might be compelling. 

Jim Peterson

Member of Arthur Andersen’s in-house legal group and a partner in its worldwide organisation until retirement in June 2001,
Chicago, IL, US

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