Big and small

Small audit firms must have winced when the Financial Reporting Council’s
investigation was published. It was scathing. So critical, in fact, of the way
small firms handle the few plc audits they have, that the FRC revealed it would
tell some auditors to cease their work with listed clients and would look for a
new way to regulate them, including some form of license arrangement.

Our story on the issue this week reveals the reason why. Some auditors are
trying to punch above their weight and falling short, by some way. And the
reason? More than likely they don’t do enough of those kind of audits to develop
the kind of professional standards that are necessary. If you are only doing one
a year, then how do you maintain and develop your expertise in the field? It’s
always going to be tough. But it has also always been a part of the UK audit
landscape. Small firms have always retained some of the plc market, the listed
companies, who have always returned to them – some for decades at a time.

Ideally, regulators would like the auditors to show some self restraint, err
on the side of good sense and turn down the big lucrative audit contracts when
they come walking through the door. But, put that way, it does sound like a lot
to ask, especially if you already believe the job is within your capabilities.
And there’s the other problem – what do you fill the revenue gap with? That’s
not an easy question to answer.

Another solution, which would prove very convenient for regulators, is for
the smaller audit firm sector to go through a bout of consolidation. That way
expertise and volume of work can be pooled. Once that happens, the capabilities
are concentrated, the frequency of the work increases and standards are easier
and more cost effective to maintain.

That sounds like a sensible route to take, but it hardly seems like something
the regulator can influence.

What the regulator has considered, as mentioned already, is some form of
licencing arrangement. Or to put it another way, a competency requirement list.
That’s an interesting proposal but it sounds troublesome. Once you start doing
that you begin to encounter many of the objections that are used against moves
to protect use of the term “accountant”. You begin to close down access to the
market. Though this is a different matter – it’s about statutory audit, not just
accounting.

The larger problem is that it would be unfair to impose such a regime on
smaller auditors without doing the same to the bigger players. If not, some
firms would face barriers to entry that others would simply side step by virtue
of their scale. It’s entirely plausible that a large audit firm could be rubbish
at auditing listed companies too.

The regulators will take the issue to the department for business for
discussion with government officials. It will not escape their attention that
restricting access to the audit market might look strange when there is still
much debate about concentration of the market among the big firms.