Choice words from audit watchdog fail to impress

Jan Babiak, E&Y

Ownership issues: Jan Babiak

The Financial Reporting
has launched its latest salvo into the audit choice debate. The
response? A distinct lack of enthusiasm.

The FRC, which wants to
open up the ownership of firms, set out its views on the subject earlier this
month. But the firms are not overwhelmed.

‘Lack of capital is not the most important obstacle to audit network
expansion,’ said Jan Babiak,
& Young’
s managing partner for regulatory and public policy.

There are issues with outside owners too, she says.

‘The current rules on ownership were designed to ensure that audit firms
remain truly independent from the companies they audit.

‘Paradoxically, auditor independence rules will either discourage investors
from investing in audit firms or disqualify audit firms from auditing many of
the companies they target. The more diverse the ownership, the smaller and more
constricted the audit market for that firm will become,’ Babiak said.

Others argue that new owners could even pose a threat to quality.

‘We are owner-operated and have severe restrictions on our ability to invest
in clients or have other business interests because we have to be independent of
their wishes. Once we relinquish this ownership, they will wish to influence the
way you behave and this is something we have to be careful of in the audit
service, which, by nature, has to be independent of those it is serving,’ said
Richard Sexton, PricewaterhouseCooper’s head of assurance.

‘This really is a question for the mid-tiers to consider, whether they
welcome the availability of additional funding in this way. I’m not sure such
funding will encourage new entrants,’ he added.

The mid-tier firms do not appear concerned with independence issues. They ma
intain that capital is not an obstacle to their growth, but they’re open to
investment, provided there is a demand for their services from larger

Grant Thornton’s head of professional affairs, Steve Maslin, said that it was
common in their experience to find that, while senior boards had no issue with
the services outside of the Big Four, it was frequently people on the ground who
appeared to be more dictated by a choice for a Big Four firm.

Whether outside ownership will prove the key move in cracking the audit
choice nut seems to be a moot point: investors say at least it might help to
recapitalise a collapsed firm.

The thing that is really sticking in the mid-tier’s craw are the agreements ­
both contractual and otherwise ­ that limit auditor choice to a Big Four firm.

The mid-tier has called for the FRC to stop being so shy about compelling
companies to disclose such arrangements from banks or others. Perhaps a report
on that would be more warmly welcomed.

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