The mything link

IT’S RARE THAT someone is cast in the role of mythbuster, but in many senses that’s the position ICAS president Alan Thomson finds himself in on restrictive clauses – the means by which banks compel clients to use only Big Four auditors.

What’s happened?

Restrictive clauses have been a bone of contention in the audit world for some time. In short, they are clauses inserted into agreements by banks which
restrict a client to only using Big Four auditors as a condition of credit terms.

The clauses have prompted complaints that they skew the audit market giving an unfair advantage to Big Four auditors based on unjustified prejudice and the mistaken belief that the prestige surrounding the Big Four means they must be better.

However, regulators have so far given the clauses little attention, claiming mostly that they receive anecdotal evidence but have yet to see one – or put it another way, the myth is not yet reality.

Thomson could be the man to change all that. Currently the president of ICAS, he’s also a former FTSE 100 finance director with Smiths Group, and is a
non-executive director with Johnson Matthey, Crossmatch Technologies in the US and Alstom SA in France.

Thomson is also chairman of a number of other companies. And that’s where the trouble starts. Because in that role as chairman he has seen a restrictive clause in action. He’s also peeved about it and willing to let everyone know.

Last week at a debate organised by ICAS he stood up, apologised
for being no theorist but said a company he worked for had been forced to choose a Big Four firm by its banks and insisted: “That’s not right.”

The significance of this comes in two parts. Firstly, Thomson is a respected figure with seniority. What’s more he is still working at the business hit with the restrictive clause so he knows exactly where the evidence is buried. In addition he has been willing to put himself publicly in the line of fire.

Thomson’s intervention also came on the same day that the chairman of the Financial Reporting Council, Baroness Hogg, said at the watchdog’s annual open meeting that the regulator still did not know enough about such clauses and that more research was needed.

To be fair, the FRC seems to have accepted the existence of restrictive clauses. In its submission to the EU consultation on audit the FRC calls for their prohibition.

But it remains odd that the watchdog continues to profess such little knowledge.

The means to end that ignorance now seems to be at hand. Thomson’s statement makes him the man to pin down the facts and produce the hard evidence that banks do force clients into using only Big Four firms. If the FRC could harness that co-operation across other company chairmen, then a clearer picture would soon be available.

And that seems critical at this stage because there is support for blocking the clauses. The open meeting heard one attendee openly insist that such clauses were “profoundly in restraint of trade”. Elsewhere, others have asked how banks that are partly owned by taxpayers could insist on conditions that appear to restrict competition.

The mid-tier firms have naturally complained bitterly about the clauses, suggesting they would compete more readily with the Big Four if such impediments were removed.

What happens next?

This week sees the EU conference on accounting and audit, coming
on the back of its Green Paper containing reform proposals for the profession. Out of the conference and the consultation the EU will formulate its agenda for transforming audit and the market for audit.

Comments like Thomson’s will undoubtedly strengthen any drive to deal with the competition issue via Big Four-only clauses.

With people like Thomson speaking from personal experience and with the paperwork to prove it, opponents will find it difficult to argue that the clauses are rare and inconsequential to the audit market. No doubt the auditors involved in his statement are smarting. But this issue isn’t about the quality of their work. This, as Thomson and others would point out, is about how they got the work.

Thomson’s robust remarks puts the subject firmly and emphatically on the regulators’ agenda, whether they be in London or Brussels.