One of the leading ‘Big Four’ accountancy firms, PwC (PricewaterhouseCooper), has been forced to sell off a piece of advanced regulatory fintech software that it spent the past four years developing in-house. The sale of the software and its associated company comes as the result of strict regulatory scrutiny from government agencies that hindered PwC from selling, using, or otherwise profiting from the software any further.
The in-house data capture software, known as ‘eBAM’, was sold to private equity firm Souter Investments and Manfield Partners Limited for an undisclosed sum after being rebranded to LikeZero for better customer engagement.
The eBAM software was used in-house by PwC to automate regulatory risk analysis for several of London’s largest banks and financial institutions, and will now continue to do so via Souter Investments under the LikeZero name. As part of a subgroup of fintech applications aimed at risk management and contract governance, the software makes it possible to collate, digitise and process large, complex data sets made up of legal derivative contracts.
The software is highly effective at reducing the amount of resources required for the processing of highly detailed data, saving both time and money for clients by removing the need for human review and intervention.
LikeZero Chief Executive Michael Lines spoke of his excitement at the new development and thanked PwC for their efforts over the years. “I would like to thank PwC for all their support and investment over the last four years and look forward to working closely with the team at Souter Investments, PwC and all our partners and clients to deliver on our and their ambitions,” he said.
He believes the sale will help LikeZero better focus its efforts on helping “financial institutions to understand and manage their counterparty risk.”
The Need for Fintech Regulations
The new fintech regulations, which first came into power in 2016 and were expanded in 2019, restrict audit firms from selling fintech to their customers and from providing advisory services to certain clients. The Financial Reporting Council (FRC) instigated the new rules with the intention to prevent conflicts of interest and strengthen auditor independence, avoiding a repeat of problems that recently resulted in several scandals and the collapse of construction giant Carillion.
In early 2018, soon after a road project near Balmedie in Scotland fell behind schedule and went over budget, Carillion went bust, forcing the government to step in and take over the responsibilities.
The collapse highlighted problems with the outsourcing of public services in a highly competitive market that motivates firms to take on risky clients and prompted the formation of better regulations in regard to auditing.
Proponents of the regulations believe they are necessary to improve public confidence in the global auditing industry. Chris Briggs, an Assurance Partner at Theta Global Advisors, said the move revealed PwC’s intentions to “realign its business model with the FRC regulations to prevent a conflict of interest with its auditing clients.”
He noted that while auditors seem to be reducing non-audit work, much still needs to be done: “If this doesn’t change, drastic measures may be taken by supervisors and Governments. We could see audits moving to be the responsibility of government-led bodies,” he concluded.
A Step in the Right Direction
By selling and rebranding the eBAM software, PwC allows the software to continue being used in a constructive manner and achieve its intended purpose. Under new ownership and with fresh branding, the eBAM software can be fully utilised to its maximum potential while meeting compliance and fintech regulations thus avoiding any conflicts of interest. PwC has also purchased its own licence to LikeZero so that all operations that use the software on its side can continue doing so unhindered.
Economic uncertainty brought on by the recent global pandemic and combined with the effects of Brexit has reignited old flames from the 2008 financial crisis, resulting in a highly sensitive industry around auditing and risk assessment. It has become more important than ever for regulators to enact strict rules to ensure both adherence to policy and public confidence in the auditing industry.
Regulators continue to work with big banks and auditing firms to safeguard the integrity, objectivity, and independence of all processes for service providers and their clients.
The role of the FRC
The FRC is the UK’s auditing, actuarial, and accounting regulator, tasked with issuing standards and practices to ensure correct procedures are being followed in the industry. UK citizens and businesses rely on the FRC to facilitate an environment of transparency and integrity within the country's financial institutions.
In late 2019, it released new revisions to its list of the UK’s Auditing and Ethical Standards, defining which services auditors of Public Interest Entities (PIE) can provide to their customers, including details on fees and non-audit services. Following the updates, PIE auditors can only offer non-audit services which are closely related in some way to the audit itself or required by law.
The changes were largely seen as positive for the UK economy and aimed at promoting the country as an attractive destination to do business.
“High quality audit supports the effective functioning of capital markets and gives investors confidence,” said FRC Chief Executive Sir Jon Thompson, speaking on the new revisions. “Where audit fails, that confidence is undermined. The steps we have taken in revising our standards include measures which our stakeholders have identified as important to strengthen their confidence in audit, by ensuring greater independence and a focus on delivering high quality and consistent work.”
The FRC recently sanctioned another ‘Big Four’ accounting firm, Deloitte, following a statutory audit of the company’s 2015 financial statements.
The agency found that review work enacted by the Engagement Quality Control Reviewer (EQCR) was not properly documented and lacked sufficient evidence related to the audit of a defined benefit (DB) pension scheme. Despite noting that the breaches were "not intentional, dishonest, deliberate, or reckless", the FRC still issued Deloitte with a financial penalty of £500,000.
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