Audit referral: Big Four resigned, mid-tier rejoice

THE AUDIT MARKET has provisionally been referred to the Competition Commission, pending a six-week consultation by the Office of Fair Trading.

The Big Four response has been muted, confining themselves to stressing the importance of audit quality and allowing market forces to run their natural course.

Richard Sexton, PwC's head of reputation and policy, said the market is "fiercely competitive" with "sophisticated buyers who thoroughly test the audit service ... on an annual basis".

KPMG insisted effective competition and pricing already exist, while Deloitte went one step further, saying: "We welcome measures that increase competition [and] support a level playing field for all parties".

Only E&Y elaborated on possible measures to "increase choice", proposing the removal of Big Four-only banking covenants and a stronger role for the audit committee in auditor appointments, among other things.

Institutes were equally cautious in welcoming the OFT decision, which could pave the way for a two-year investigation by the Competition Commission, culminating in potentially nuclear measures to reduce Big Four dominance.

At their most extreme, these could involved the forced break-up of the Big Four. However, less stringent controls could be almost as painful, such as a cap on the number of FTSE350 audits they are allowed to take on board.

ICAEW head of technical strategy Robert Hodgkinson said any potential market interventions must be subject to "rigorous impact assessment" and prioritise audit quality at all times.

James Barbour, director of audit and accounting at ICAS, had similar qualms, warning: "We remain to be convinced about the practicalities of potential remedies that might be put in place to increase competition in the large company audit market."

Their concerns echo those raised by the OFT in recent months, when it questioned whether the global reach of the Big Four would nullify any potential measures imposed by the UK-bound Competition Commission.

However, such worries appear to have been resolved. The forthcoming six-week consultation is standard practice at the OFT, and chief executive Clive Maxwell insisted: "We will of course consider any consultation responses before making a final decision."

Smaller firms enthusiastically embraced the announcement, with heel-nippers Grant Thornton and BDO particularly fervent. GT audit partner Steve Maslin said the referral will remove the "arbitrary cut-off point" that reinforces the Big Four position and refocus the market on "the quality of audit provision".

BDO's James Roberts said change in the wider audit market is now widely welcomed. Both firms insisted on maintaining the momentum of the decision through the six-week consultation to a full commission inquiry, and RSM Tenon chief Andy Raynor enthused: "Change seems to be inevitable".

Meanwhile, PKF called on the commission to address barriers to entry in the small-cap market, saying this would eventually lead to a greater penetration of the FTSE100 by non-Big Four firms.

Perhaps the most interesting response came from investor consultancy PIRC. The group accused firms of "regulatory capture" leading to increasingly defensive standards that reduce auditor liability and are intentionally complex so as to "enhance time spent [on audit] and fees of listed company clients".

It said large firm mergers - partially responsible for reducing the number of players at the top of the market - are more focused on increasing global reach than proper audit delivery.

The consultancy also warned that firms have allowed their primary purpose - to give a true and fair view of the health of a company - to be eclipsed by an obsession with standards compliance.

It concluded: "This referral must just be the beginning of a reform of the industry, its standards in practice, and the standards it follows."

Stakeholders have until 9 September to provide the OFT with a written response to the consultation, and a final decision on referral is due before the end of the year.