Haddrill: We don't need a Big Five

The new head of the UK’s accounting watchdog said there was little evidence to justify a fifth big player in the concentrated audit market, and will instead plough his efforts into planning in case of a Big Four collapse.

Stephen Haddrill, the new Financial Reporting Council chief executive, in his first interview since taking the post, said there was little chance a global challenge to the Big Four – PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG – would emerge in the near future.

“I don’t think it is achievable in the near term and the priority for us has to be that we are prepared for the worst and that is where I will put my focus,” he said.

The worst, according to Haddrill, is the global collapse of a Big Four auditor, which has the potential to throw markets into chaos.

He believes the FRC should concentrate on maintaining high standards among the larger firms while simultaneously provisioning for a collapse.

“I would rather make sure that we can have complete trust in the audit firms, that they understand global business and they have a basis for overseeing the audit of global companies… That’s more important to me than finding firm number five,” he said.

“We have looked at the levels of competition, we have looked at the levels of pricing and, I suppose, if you look at the levels of pricing as the first question, we haven’t got an enormous amount of evidence that says we need firm number five.”

The move signals a change in direction from Haddrill’s predecessor Paul Boyle, who used his time looking to promote greater audit choice.
Mid-tier firms BDO and Grant Thornton have long argued that restrictive banking covenants and institutional recalcitrance have blocked firms from breaking into the top tier.

Scott Barnes, CEO at Grant Thornton, said he would be “very interested” to hear from Haddrill on practical steps the FRC can take to bring in greater competition and choice.

“You simply cannot guarantee a Big Four firm won’t fail, the only real solution is to take steps to increase competition and choice based on audit quality now, rather than wait for it to be forced on the profession by another crisis,” he said.

Simon Michaels, managing partner at BDO, said the FRC has the balance right at the moment “and promoting competition in the profession is a good thing”.

In a wide-ranging interview Haddrill also criticised continuing efforts to converge US and international accounting rules. He said the focus should be on creating high-quality international standards, rather than convergence.

“We have got to work together, but we have to work together around the goal of producing good quality standards, not just about translating American standards into an international shape.”

Further reading:

Profile: Stephen Haddrill, chief executive, Financial Reporting Council