When EY Broke, Shanghai Opened and Social Unrest Widened

Weekly Recommendation

When EY Broke, Shanghai Opened and Social Unrest Widened

This is the nineteenth edition of weekly recommendations. Watch this space for facts, news, trivia and research around the world. Topics range from economics, public policy and psychology to finance, society and current affairs. Access all weekly recommendations here.

EY breaks

EY, one of the Big Fours of auditing, has announced that it will separate its auditing and consulting services into two different companies.

Big four accounting firms usually cater for clients with their auditing as well as consulting services. Of which, auditing accounts for a smaller share of the revenue. An auditor, therefore, has a very less incentive to raise concerns when the same client contributes to a much larger revenue pool through the firm’s consultancy work. Therefore, such arrangements have always drawn flak due to conflict of interest situations.

Auditing firms have always been criticised for not tracing potential frauds or being an accomplice in some of them. Recently, EY has come under pressure in a bankruptcy case of German payments firm Wirecard AG.

In 2019, UK’s regulator had called for ‘operational separation’ of audit and consulting within the existing firms. The Financial Reporting Council (FRC) ordered EY, Deloitte, KPMG and PricewaterhouseCoopers to ringfence their audit functions from the rest of the business by 2024 to assuage conflict-of-interest concerns.

Deloitte set up a new audit governance board in January 2021, but EY’s plan goes way beyond that in its intention to create an entirely new business. PwC sold a tax advisory practice to Clayton, Dubilier & Rice last year, while KPMG offloaded its UK restructuring arm to HIG Capital LLC.

This will add some trouble to the employees and partners as well. Auditing is considered laborious and less attractive than consultancy. It has become riskier due to higher responsibilities as well. People often switch roles within firms, which will now become more difficult. Auditing needs to be revamped and experts believe that ESG auditing might add more flavour to it.

Read – Bloomberg, Accounting Web, and Malay Mail for more information.

Shanghai Reopens

After two months of lockdown, Shanghai, the world’s largest container port city, is now set to return to normal. However, the authorities, in a leaked press statement, ordered the media not to call it a ‘lockdown’.

Due to the lockdown, the port had a backlog of 260000 containers in April. The average waiting time for tankers, container ships and bulkers at Shanghai port is now down from the peak of 66 hours during the month of April to 34 hours. The port is now running at 80-85% of its full capacity.

According to joint research by Windward and Sea-Intelligence, once the port reopens fully, it will focus on imports of containers that cater to domestic factories, which were shut due to lockdown. Once exports are out, ports in US and Europe will see a tsunami of ships harboured at their ports.

According to New York-based Ocean Audit, a total of 690,000 TEU is destined from Asia to Long Beach and Los Angeles between May 25 and July 1, up from last year’s “extreme” 646,000 TEU for the same period. Supply chain related issues, therefore, will continue till July, it seems.

The reopening of activity will lead to an increase in demand for petroleum products that have pushed oil prices higher in the last few days. “The mood on the oil market is seemingly turning ever more bullish,” said Julius Baer analyst Norbert Rucker.

Shipping costs might also increase the number of ships to and from China and the US/Europe will rise in the next couple of months.

Rising Social Unrest

IMF’s Social Unrest Index has increased in the last few months. It has touched its peak since the onset of the pandemic.

Prior to the pandemic, unrest began in Chile and a few Latin American countries in late 2019. At the same time, Algeria, Iran, Iraq and Lebanon started seeing significant civil unrest. The pandemic, later, paused such movements. In 2020, we witnessed racial justice protests in the US, ethnic tensions in Ethiopia and anti-government protests in Brazil, Lebanon and Belarus.

During the later stages of the pandemic, countries such as Canada, New Zealand, Austria and Netherlands saw anti-lockdown protests. Social unrest in these countries is usually rare.

In emerging markets and developing economies, the apparent motives for recent unrest have been more diverse, with examples including anti-government protests in Kazakhstan and Chad; a coup in Burkina Faso; regional protests in Tajikistan; and a constitutional crisis in Sudan.

IMF believes that rising prices could fuel the anger. Any rise in social unrest could pose a risk to the global economy’s recovery, as it can have a lasting impact on economic performance.

(The article mentioned some minor and major protests across all countries – small as well as big. But it ignored almost 16 months long farmers’ protests in India.)

– Swapnil Karkare