Relaxing audit firm ownership could stimulate growth

The cool response from audit firms to the idea of outside investment, pushed in an EU-commissioned study, may suggest it’s a non-starter.

However, one man who believes that firms shouldn’t be too quick to close themselves off to the idea is Tenon chief executive Andy Raynor.

As the head of one of the UK’s few listed accounting firms, Raynor has walked the walk when it comes to opening up accounting services to external investment.

‘An external capital structure can work for a professional services company. The partnership structure is not the only way to run a firm. The point is to make a firm grow, and external funding can certainly make that happen,’ Raynor said.

Regulators in the EU and the UK’s Financial Reporting Council have expressed the hope that loosening ownership rules, which restrict audit firm ownership to accountants, will unlock the market and allow smaller firms to grow more rapidly and provide an alternative to the Big Four.

But senior figures from PricewaterhouseCoopers, Grant Thornton and BDO Stoy Hayward have all expressed their scepticism about the mechanics and benefits of pumping outside investment in audit firms.

Unlike Raynor, the mid-tier and Big Four have argued that outside investment into audit practices is a non-starter in present conditions because the risks posed by audit liability will be too much for investors and private equity houses to handle.

‘Until liability reform is sorted out I can’t see why any investor would want to invest capital in business that faces the risks that auditors do,’ said PwC’s Peter Wyman.

Raynor, however, is not convinced that risk is too great an obstacle. ‘It is a commercial equation. External investment will be made according to how risk is managed. External investors may even pay more attention to risk than firms already do,’ he says.

‘Other sectors, such as insurance and banking, that present similar risks to auditing and are highly regulated, exist quite comfortably as public companies or companies with private investment.’

Another argument against outside funding is the idea that external investment in auditing will create unworkable conflicts of interest, as auditors will find themselves in a situation where they are auditing clients with links to the firm’s backers.

Raynor, again, disagrees: ‘The capital market is a very big place and it is possible to receive backing without creating conflict issues.’

Jeremy Newman at BDO Stoy Hayward points out, however, that although outside capital has allowed listed accounting firms such as Tenon and Vantis to be successful, the investment has not pushed these firms into contention for FTSE 350 work, the stated aim of regulators for tinkering with ownership rules.

‘The problem with the accounting profession is that although the corporate ventures such as Vantis and Tenon have been commercially successful, they do not compete in the FTSE 350 marketplace,’ Newman says.

Raynor acknowledges that his firm has focused on owner-managed business and entrepreneurs rather than blue chip plcs, but believes there is potential to invest in audit and generate growth.

‘Audit is a regulatory necessity. The dynamics are different, but if you understand how audit works and what the growth expectations are, it can be an attractive proposal,’ Raynor said.