BDO and the LSE report: transparently clear

Jeremy Newman, managing partner of BDO Stoy Hayward

The recently published research by the London School of Economics into the impact of market concentration on fees in the UK market is intended as a further contribution to an important, ongoing debate.

The conclusions of the research (the result of many months of work by world-renowned independent academics) are those of the LSE and the LSE alone.

In their words: ‘During the time period 2002 to 2006, increases in the joint market share held by the largest four auditors are strongly correlated with higher audit fees paid by UK-listed corporate clients.’

It is disappointing that some have chosen to dismiss these conclusions as merely BDO Stoy Hayward’s interpretation.

The full research report has been made available to all interested parties and, judging by the responses received from around the world, there is a desire to apply the results to ensure the market is functioning in a free and fair way that is beneficial to both buyers and providers of audit services.

The LSE has shown that this is not the case at present.

Their data on concentration and audit fees proves that there are parts of the market in which competition is distorted and is not ‘open to all’. Audit quality is of course crucial but does not necessitate a distorted market.

It is now widely agreed that market concentration is an issue by organisations including the Market

Participants Group established by the FRC which had representatives of the Big Four and others.
It is disappointing that some have not recognised this and want to keep the debate firmly stuck in the
past. It is regrettable that these same people continue to promote the myth that size is a proxy for quality to enable them to justify the status quo.

According to research by Ipsos Mori, this argument does not convince institutional investors who are the end-users of the statements auditors produce.

The LSE’s research should encourage us all to engage in open, constructive and responsible debate on how the market can be opened up for the benefit of all.

That means being brave and grasping the issues and not pretending they don’t exist. I encourage others to join us in seeking solutions.

Jeremy Newman is managing partner of BDO Stoy Hayward