Updates: Fiat-Chrysler and PSA Peugeot Merge; Boeing Halts 737-Max Production; and the Latest British Review of the Audit Sector Makes New Proposals

A number of developments regarding stories that we have been covering for quite a while here in Financial Regulation Matters have taken place recently, so in this post we will look at some updates on each one to see how the issues are developing.

Fiat-Chrysler Finally Merge with PSA Peugeot

We last looked at developments within the automotive industry in September with the credit downgrade of Ford, but one of the underlying sentiments within the industry has been that companies may, or will need to merge in order to survive their environment. Tougher regulations, increased costs, potentially saturated marketplaces, the need to keep up with technological advancement, and inconsistent and unpredictable economic and social arenas are making the job of manufacturing and selling cars much harder. The three largest automotive players are Toyota, Volkswagen, and the Renault-Nissan alliance. Now, the fourth largest is this new PSA-Fiat Chrysler merged partnership which, according to the Independent, will produce nearly 9 million cars a year and generate €170 billion in sales a year. The new entity will be led by PSA’s Chief Carlos Tavares, who has gained a reputation for being an incredibly efficient ‘cost-cutter’ – it is therefore not a surprise that Tavares has been tasked with leading the entity, as it must cut $4 billion (although it has not been declared where and how these costs will be cut). This has led to some concern from British groups in particular, as the Vauxhall plants in Ellesmere Port and Luton teeter on the brink; there have been discussions in the past whereby Tavares has made clear that the plants must remain profitable or else he will move the production elsewhere. Union figures have suggested that ‘the fact remains, merger or not, if PSA wants to use a great British brand like Vauxhall to sell cars and vans in the UK, then it has to make them here in the UK’. This, of course, is not true at all, but demonstrates the importance of the merger to the lives of many. Ultimately, the deal should take around 15 months to complete and will, in all likelihood, precipitate more mergers in this marketplace as companies seek to protect themselves from the harsh environment that is surrounding them.

Boeing Halts Production of the 737-Max

We have looked at the 737-Max crisis for Boeing before (here), which has developed since the two planes came down killing nearly 350 people. Boeing had been confident that the FAA would clear the plane to fly before the end of the year, suggesting that the ever-growing cost of this crisis – which has been estimated to be at $9 billion and rising – would secede. However, the FAA have declared that ‘the aircraft will return to service only after the FAA determines it is safe’. With the FAA facing pressure over allowing the first batch of planes to fly with the malfunctioning safety system, it is clear that they do not want to be seen as presenting a light-touch regulatory solution to this important issue. Also, if cleared to fly but then another plane falls, the blowback on the FAA would be extreme. It is for this reason that there are fears within Boeing that the ban will not be lifted until the Summer of 2020, perhaps even later. The cost for missing the peak-season for the company could be massive. So, for that reason, the company has decided to stop its reduced-rate of production that was in place during the suspension. Boeing declared that ‘we have decided to prioritise the delivery of stored aircraft and temporarily suspend production on the 737 programme beginning next month’. In response, the company has moved staff on that production line to other lines, and investors will be waiting with baited breath to find out the financial impact, with the next set of financial declarations due at the end of January. What is clear is that there is plenty more pain left in the tank for Boeing.

British Enquiry into Auditing Issues Argues for New Qualifications

The audit sector has been the focus of a large proportion of the posts here in Financial Regulation Matters (here, here, and here as just a few examples). Now, in the latest review commissioned by the May government in the aftermath of the Carillion crisis, Sir Donald Brydon – former Chairman of the London Stock Exchange – has led a review that assessed the quality and effectiveness of audit. The review’s report, lasting 135 pages, covers a number of issues like the relationship between the firm and its shareholders, engaging shareholders more generally, the auditing process, and the regulation of the field. However, one point has stood out above all the rest. In making the fair and accurate point that ‘it’s not the auditors that cause companies to go bankrupt. It’s the directors who are responsible for bankrupting a company’, Sir Brydon used this basis to suggest that what is needed is a separation between auditing and accounting, with the former becoming a new profession complete with its own qualifications, regulations, rules, and penalties. This suggestion has been based on that, for Sir Brydon, ‘it was quite a startling discovery to me that there was not an audit profession as a standalone entity’. This is a reasonable and valid observation because, as he continues, ‘the qualities you need to be an auditor are quite different to those you need to be an accountant’. Quite. The Competition and Markets Authority’s Chairman Andrew Tyrie said that the ‘robust proposals are a big step forward’, but it is this concept of competition that would be the major issue if these reforms were enacted.

For example, if they were, where would the newly-developed auditing companies come from? They would be spin-offs from the established Big Four (and probably Big Six). It is no wonder that the deputy CEO of Deloitte said that the report added ‘much needed clarity’; in one foul swoop the accusations levelled towards the Big Four of needing to be more involved in spotting aspects like fraud would be removed, and an entirely new revenue stream would be opened up to them. However, this would cause issues. There would need to be efficient ‘walls’ between the new entities and their accounting brethren, and we know full well the so-called ‘Chinese walls’ that are usually erected have not always been fit for purpose. Would the two companies be able to insulate the information about which company has utilised their services so that the corresponding entity would not factor that into the final decision? Hypothetically, a new auditing entity spun-off from PwC may be more inclined to pass of an audit for a company who had been using PwC for its accounting needs – with the forced separation and the development of a new ‘industry’, can regulators provide efficiency insulation between the two? Do they have the resources to get ahead of this issue? Only time will tell. However, this solution looks like a particularly palatable one to all involved. Governments can say they have acted and imposed now qualifying standards. The Big Four (or Six) can say they have obliged with the demands. Regulators can attempt to develop strategies and mechanisms to allow for the two stand-alone industries to operate. Whether or not this reduces the likelihood of a company collapsing just days after being given a clean bill of health is another issue altogether, however. If one was cynically minded, it could be advanced that the proposed system would limit the exposure to penalties of the established Big Four (or Six) to that of the spun-off entity, which would be massively beneficial for these global behemoths.

Keywords – cars, automotive, planes, Boeing, 737-Max, audit, accounting, reform, @finregmatters