Big Four and Beyond: Is bigger better?

With the advent of rules governing the use of auditors for non-audit work,
and a general climate that doing so is simply not ‘best practice’, many
companies have looked farther afield for their tax, corporate finance and IT
advice. That has led to opportunities for mid-tier firms, the practices that are
challenging the dominance of the Big Four. But although everyone agrees that
such firms have been successful in developing their non-audit work, they have
yet to break the audit stranglehold of the Big Four.

So, should mid-market companies not only think about hiring them as tax
adviser, but also as an auditor? Hiring a smaller auditor is an issue likely to
expose prejudices on all sides, and any mid-market company would be forgiven for
subscribing to the audit equivalent of the corporate legend: no one ever got
fired for buying IBM.

Depending on how you slice and dice them, the mid-tier comprise the likes of
BDO and Grant Thornton in the first rank of challengers, turning over almost
£300m each, a short drop to Baker Tilly (£183m), and then a collection of firms,
all substantial concerns, including Smith & Williamson, PKF, Tenon, Moore
Stephens, Robson Rhodes and others.

Unsurprisingly, the tier A firms, as they like to call themselves, are keen
to point out that the traditional impression that the Big Four are somehow miles
better than the rest is misconceived. Earlier this year, when discussing the
rivalry, Steve Maslin, head of assurance at Grant Thornton, said: ‘I am tired of
the sustained campaign by the Big Four that they provide better audits than
anyone else. We have taken over audits from Big Four firms and found problems in
the accounts.’ There is no love lost in this relationship, you might say.
Though, occasionally, the two sides are more polite about each other. Giles
Murphy, head of audit at Smith & Williamson, says: ‘The Big Four do a
fantastic job at a certain level of the market. That’s just not something we are
capable of doing.’

Peter Wyman, head of professional affairs at PricewaterhouseCoopers, says
grudgingly that ‘other firms can do a perfectly good job.’ But he will also
insist that this is not a quality issue, and merely one of scale. On the other
side, the Big Four like to point out that there is a big difference in quality.
Sometimes they are subtle about it.

Wyman wrote recently of the Oxera review into audit choice: ‘The four largest
firms are auditors of choice to the FTSE 350, largely because they are seen to
have greater capacity and international coverage, the best people,
industry-specific knowledge and relevant “value-added services”.’

Sometimes they are less subtle about it. ‘You can have a seven- or
eight-year-old banger that will get you where you want. If you can afford it,
why not buy yourself a new car. You can manage with a mini, but if you can
afford a Mercedes you might decide that’s a good way to spend your money,’ says
Wyman, in another mode.

The big firms have also been adept at linking themselves to the word
‘quality’ in as subtle a way as possible. The debate over quality and audit
choice is enough to give any FD a headache. In the midst of claim and
counter-claim, how can you make your mind up?

A couple of things might be worth pointing out. There is probably prejudice,
for instance, as the recent issues at Sanctuary seem to indicate. The company,
an artist management group, fell out with its auditor, Baker Tilly, over issues
in its accounts. The firm qualified Sanctuary’s accounts, at which point the
managers opted to open the audit contract out to tender, eventually putting KPMG
in and asking shareholders to approve their decision.

Investors voted in KPMG almost without thinking. Would they have done the
same if the previous auditors had been PwC? It seems unlikely. Throughout the
process, hedge fund managers, looking to short the stock, muttered about the
company’s small auditor. All involved had a shock in store when the Financial
Reporting Review Panel, which looks into company accounts, backed Baker Tilly’s
audit. The chief executive of Sanctuary subsequently lost his job.

Such cases are open to interpretation, but there is little doubt that
investors occasionally feel more at ease with the Big Four. Murphy says:
‘There’s still institutional prejudice in the mid-market sector that buying the
Big Four buys a certain quality. It’s changing, though.’

There are also other question marks. Some of the most activist investors,
such as Morley and Hermes, which question the Big Four, themselves employ Big
Four auditors. If the mid-tier isn’t good enough for them, why should the
companies they own employ one?

There are other things to consider, too. For many very international outfits,
the Big Four may well be the only choice. The mid-tier operate in many parts of
the world, but the links are self-evidently not as close.

KPMG, PwC, Deloitte and Ernst & Young are broadly known as by that name
in most major markets. But BDO Stoy Hayward’s US partner is, confusingly for
clients, BDO Seidman.

The smaller auditors admit they cannot provide such audits. Murphy says that,
through the Nexia network, it operates in 90 countries around the world, but
that it is strongest in North America, continental Europe and Australia.

PwC merged in 1998 to give it a truly global scope. ‘One of the reasons for
the merger was to significantly invest in networks in countries that were
becoming increasingly important to multinational companies,’ adds Murphy

There are particular sectors,where the Big Four are on top, too, although
there has been some movement recently. Murphy suggests that S&W is picking
up natural resources clients. ‘Traditionally, we don’t deal with them because we
are based in London. That’s off the back of the Aim market.’

The Big Four, by comparison, are particularly strong, indeed probably the
only auditors, in financial services. ‘I think there are a lot of companies that
at one level we could say do not need a Big Four auditor,’ says Wyman. ‘They
have operations in countries where other networks exist, and not in specialised
areas. The Big Four have that specialism. And yet, actually, people are
increasingly coming to us saying we know you are not the cheapest, but we think
the audit is sufficiently important and so we want someone who is the best, not
just someone who ticks the box.’

One company, he says, came to PwC, feeling that though its smaller auditor
was competent, ‘it just wasn’t getting the advice it felt it needed to be

At the same time there is unnecessary resistance. ‘People don’t change their
current account. They whine and moan, but it’s too much hassle to change,’
Muprhy says. That doesn’t mean they shouldn’t, even if there is significant

It should be added that PwC does not like to give the impression it is only
interested in big companies. It launched an advertising campaign recently
targeting that idea specifically, saying it is looking for ‘companies like mine’
and not just ‘big companies’. ‘This is a market we are interested in,’ says

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