Audit choice dilemma may not be resolved for '10 to 15 years'

Sir Mike Rake, chairman of BT

One of the country's most senior accountants has said it could take as long as 10 to 15 years before another firm grows large enough to resolve the lack of audit choice facing UK companies.

Watch the full interview with Sir Mike Rake at AccountancyAgeTV

Sir Mike Rake, former international chairman of KPMG and now chairman of BT, said the appearance of a new big firm would depend on settling liability issues and being able to grow with big clients.

'It's 10 to 15 years - it's going to take time. If we can create the right environment for firms to invest, creating the environment from a liability point of view, its worthwhile for firms [outside the Big Four] to grow with their clients.

'We [the Big Four] grew with our clients, and then expanded our capability as the markets evolved,' Sir Mike told Accountancy Age in an exclusive interview.

However the Financial Reporting Council's chief executive Paul Boyle said there were already signs in the market that things were changing and recommendations made in the recent Market Participants Group (MPG) report on audit choice would have an effect as early next year. He said other changes could be as close as four years away.

Sir Mike's comments came as the MPG published 15 recommendations to resolve the lack of choice within the UK audit market. Sir Mike also disagreed that investing in the mid-tiers, as previously suggested by the FRC chief, is a solution to greater choice. 'The answer here in my personal view is that it is not an external capital issue. And there are restrictions and other issues to do with independence.

'I can't quite see why that would be attractive to anyone,' Sir Mike said.

But Boyle defended his views on buying into firms.

'If you're going to bring about a significant increase in capacity to firms outside the Big Four, then there needs to be investment from somewhere. That could either come from firms or existing resources or outside.

'If you insist that investment comes from firms' existing resources, you will depress earnings of those firms, which will make it more difficult to attract and retain the high calibre of people needed to make the firm successful.

'The big firms are investing in their capabilities and can do so from existing profitability with less need for outside capital,' Boyle said.

Big break for big four

The Big Four’s audit revenues have increased to £2.5bn (from £1.8bn) since the inception of the Financial Reporting Council’s study into audit choice began two years ago.

The £700mincrease constitutes the approximate amount made by the rest of the top 50 firms together, from audit in one year.

In 2008, the FRC is to begin its consultation on the possible effects of changes to audit firm ownership rules. The MPG recommendation states this would be subject to there being sufficient safeguards to protect auditor independence and audit quality.

Watch the full interview with Sir Mike Rake at AccountancyAgeTV