One of the most significant suggestions made by the Financial Reporting Council as part of its investigation of ways to break the stranglehold of the Big Four on major audits is that auditors should be forced to disclose their profits on audit work.

While accountants are presently only required to state revenues, the FRC has made it clear that it hopes that making audit profit disclosure mandatory will open the way to more audit players for plcs in the market.

Such a move would enable clients to see how much profit the Big Four accountancy firms make from their audit departments. These profits are partly because the Big Four typically adopt a broad brush approach to auditing where work is designated to junior level staff and the involvement of the audit partner is minimised.

This broad brush also extends as far as the levels of materiality that applies in Big Four audits of multinational businesses where turnover, and often profits, are counted in billions.

Indeed, insofar as most plcs are concerned, audits are generally regarded as little more than a legislative requirement. That is why they will typically look for external auditors to do what they have to do as quickly as possible and with the minimum of fuss and disruption. After all, plcs have their highly-skilled in-house internal audit divisions, which are more than capable of fulfilling their own audit function.

This way of working contrasts sharply with the audit work undertaken by a mid-tier firm where, rather than adopting the broad brush approach, the audit team is more likely to be in daily dialogue with the finance director of a plc client. Here, partners are on hand throughout the process, supporting the audit team by offering guidance on tricky issues and reassuring the client of the validity of the exercise.

Safe pair of hands

Nevertheless, many FDs will insist on appointing Big Four firms because they regard them as a safe pair of hands so that there is less risk of criticism arising as a consequence of appointing a Big Four auditor than there would be from the appointment of a mid-tier practice.

One consideration here is that the FD is so remote from ownership that consideration of value-for-money audits tend not to have much impact. Another, of course, is that in each of the various major corporate frauds and scandals that have emerged over recent years, the audit was undertaken by a Big Four firm.

Other suggestions by the FRC include opening the files of outgoing auditors to their replacements, requiring companies to provide investors with more information on the audit selection process and allowing shareholders to vote on audit committee reports. However, these proposals are less likely to have any effect on dismantling the stranglehold that the Big Four have over audits.

Few outgoing auditors, Big Four or otherwise, would welcome the suggestion that they should open files to their replacements, though they are obliged by professional standards to disclose all relevant information. Similarly, allowing shareholders to vote on audit committee reports is likely to be a waste of time.

Shareholders already have an opportunity to vote on whether or not to reappoint auditors at the AGM. Besides, given that the main shareholders in plcs are typically institutions and pension funds, allowing shareholders to vote on audit committee reports would make little difference.

Yet, while the suggestion that auditors should be forced to disclose their profits on audit work has a great deal to recommend it in principle, in practice, it could have significant cost implications for mid-tier firms. The production of such disclosure is unlikely to be straightforward, partly because their audit departments and partners will not always be devoted exclusively to audit work, making the assignation of costs far more complex than it is for the Big Four firms.

Finally, the proposal raises the interesting question that, if auditors are compelled to show the profits they make from audit work, then who will audit the profits calculated by auditors?

Robert Kerr is managing partner of chartered accountants French Duncan

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