FRC report unlikely to affect audit choice

Ernst & Young says that, although some of the Financial Reporting Council’s recommendations could bring valuable improvements to the overall effectiveness of the audit market, some might have no effect at all on choice.

‘Indeed, in some cases, while creating a more effective competitive market, the recommendations may actually reinforce the confidence and trust placed by the market in the largest firms,’ Gerald Russell, E&Y senior partner, said.

‘One of the more far-reaching recommendations is the proposed change in audit firm ownership. It is not clear how this could advance the development of additional global networks, as significant investment decisions tend to be multi-geographical in scope.

‘The MPG (Market Participants Group) has not discounted its recommendation for the raising of equity to improve choice in the audit market – which is surprising. In our view capital could not be raised to provide an adequate reserve for even one catastrophic loss, as the risk would be too great for a market-driven return on investment. Therefore, it would be like asking investors to take a long-term view on a high-risk investment for a relatively low return.

‘Investors from outside a firm could inadvertently reduce choice, constrict competition, create conflicts of interest and breach independence rules, which have the potential to preclude their audit businesses from pursuit of certain clients for audit services.’

Further reading:

Market Participants Group unveils its recommendations

Tackling big four dominance