The cool response from audit firms to the idea of outside investment, pushed
in an EU-commissioned study, may suggest it’s a non-starter.
However, one man who believes that firms shouldn’t be too quick to close
themselves off to the idea is Tenon chief executive Andy Raynor.
As the head of one of the UK’s few listed accounting firms, Raynor has walked
the walk when it comes to opening up accounting services to external investment.
‘An external capital structure can work for a professional services company.
The partnership structure is not the only way to run a firm. The point is to
make a firm grow, and external funding can certainly make that happen,’ Raynor
Regulators in the EU and the UK’s Financial Reporting Council have expressed
the hope that loosening ownership rules, which restrict audit firm ownership to
accountants, will unlock the market and allow smaller firms to grow more rapidly
and provide an alternative to the Big Four.
But senior figures from PricewaterhouseCoopers, Grant Thornton and BDO Stoy
Hayward have all expressed their scepticism about the mechanics and benefits of
pumping outside investment in audit firms.
Unlike Raynor, the mid-tier and Big Four have argued that outside investment
into audit practices is a non-starter in present conditions because the risks
posed by audit liability will be too much for investors and private equity
houses to handle.
‘Until liability reform is sorted out I can’t see why any investor would want
to invest capital in business that faces the risks that auditors do,’ said PwC’s
Raynor, however, is not convinced that risk is too great an obstacle. ‘It is
a commercial equation. External investment will be made according to how risk is
managed. External investors may even pay more attention to risk than firms
already do,’ he says.
‘Other sectors, such as insurance and banking, that present similar risks to
auditing and are highly regulated, exist quite comfortably as public companies
or companies with private investment.’
Another argument against outside funding is the idea that external investment
in auditing will create unworkable conflicts of interest, as auditors will find
themselves in a situation where they are auditing clients with links to the
Raynor, again, disagrees: ‘The capital market is a very big place and it is
possible to receive backing without creating conflict issues.’
Jeremy Newman at BDO Stoy Hayward points out, however, that although outside
capital has allowed listed accounting firms such as Tenon and Vantis to be
successful, the investment has not pushed these firms into contention for FTSE
350 work, the stated aim of regulators for tinkering with ownership rules.
‘The problem with the accounting profession is that although the corporate
ventures such as Vantis and Tenon have been commercially successful, they do not
compete in the FTSE 350 marketplace,’ Newman says.
Raynor acknowledges that his firm has focused on owner-managed business and
entrepreneurs rather than blue chip plcs, but believes there is potential to
invest in audit and generate growth.
‘Audit is a regulatory necessity. The dynamics are different, but if you
understand how audit works and what the growth expectations are, it can be an
attractive proposal,’ Raynor said.
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