Planning for the audit crash

The FRC has called for companies to consider the fallout from an auditor
crashing out of the market in an update to its Guidance on Audit Committees.

The tweaks have been made in response to the recommendations of the Market
Participants Group’s report on promoting choice in the audit market, published
in October 2007 and the update makes a push for audit committees to consider
‘the risks associated with their external auditor leaving the market.’

Concentration in the audit market has been a bugbear for the regulators, but
it is no secret blue chip companies look for the know-how of the leading
quartet. The Big Four has a complete monopoly on the FTSE 100 and apart from a
handful of companies the situation is the same in the FTSE 250. As the FD of a
leading software security company said, ‘You’ve got to ‘walk the walk [by having
a Big Four auditor].’

But as FRC chief Paul Boyle said recently: ‘We’ve gone from the impossible to
the inevitable without passing probable.’ The nightmare scenario, he says, of a
firm crash cannot be ruled out.

The document asks audit committees to disclose more information about the
process by which the auditor was selected in the company’s annual report,
raising the prospect of more boiler-plate verbiage in company papers.

Boyle also raised ‘continuity of supply’ problems if the Big Four ever became
the Big Three.

The paper also called for a group to consider factors involved with engaging
firms from more than one network to work on the audit, which means that audit
committees may find themselves with a bigger workload in the future.

‘Audit committees perform a vital role in protecting the interests of
shareholders,’ said Boyle. ‘We hope that the revised guidance will encourage
more engagement between companies and their shareholders on the selection of the
external auditor and the role and responsibilities of the audit committee more
generally.’