Audit choice a four gone conclusion

It could be ten to 15 years before the audit market is opened to more than
just four firms, the former chairman of KPMG Sir Mike Rake has said.

The comments may provide some cover for the Financial Reporting Council this
week, as the fruits of a two-year project to try and open the audit market
appeared largely imperceptible to the profession.

The Market Participants’ Group report, released at the beginning of last
week, into market options to open audit to a much larger panel of auditors, was
always likely to disappoint those hoping for a quick fix.

When the FRC kicked off the project two years ago, grand expectations of
competition authorities weighing in and other radical solutions appeared to be
on the table. Two years on, and the best the FRC seems to be offering is a plan
to open up the ownership of audit firms, to subject them to corporate governance
rules and investigate joint audit.

Some were distinctly unhappy with that result. Jeremy Newman, managing
partner at mid-tier challenger BDO Stoy Hayward, said: ‘It is disappointing that
the final recommendations appear unlikely to spur real change in the market.
There was an opportunity to make real change and give a strong signal to the
market about unacceptable institutionalised prejudice, by taking stronger
measures to deal with the requirement of banks and others to use certain audit

‘The recommendation on this topic is modestly helpful, but we believe this is
a missed opportunity to remove a real barrier to competition.’

No doubt Newman and others would draw attention to the views of Big Four
partner Gerald Russell, who as much as admitted that the report would be
unlikely to change the status quo.

‘[The moves] are unlikely to have a significant impact on the MPG’s stated
objectives to improve choice, and some may prove to have no effect at all.
Indeed, in some cases, while creating a more effective, competitive market, the
recommendation may actually reinforce the confidence and trust placed by the
market in the largest firms,’ said Russell.

While many remain disappointed that the problem has not been solved
overnight, most agree that this is not something that can be solved easily ­ or
by just one national authority.

There is, as has become something of a cliché, no ‘silver bullet’.
However, there are concerns about whether or not the US will take a more
interventionist approach. Just as the US reacted strongly to Enron in pushing
through Sarbanes-Oxley, some fear that a legislative hammer will be brought to
bear to crack this admittedly considerable nut.

Deloitte assurance partner Martyn Jones said he hoped the US went down the
‘market-led’ route.

‘The advantage of being market-based is that we will have more global impact.
If one tries regulatory approach, then everything is dependent on statutory and
regulatory processes, which, for many countries, is hard to achieve with
consistency,’ said Jones.

It is fair to say the force of Big Four lobbying is probably being brought to
bear to prevent that from happening.

The scale of the task is vast, and when people consider that a firm like
Grant Thornton or BDO might come to challenge the Big Four, they do so ignoring
the numbers.

In the time the FRC’s project has been running, the Big Four’s audit revenues
have grown from £1.8bn to £2.5bn. That £700m increase is around as much as the
rest of the top 50 firms make from audit in any one year put together.

The US plans are not well advanced at the moment. The committee overseen by
former SEC chairman Arthur Leavitt held its first meeting only last week.

The EU is conducting separate consultations into audit firm ownership. This
is FRC chief executive Paul Boyle’s big idea. If the EU is keen on pushing that
plan, and the FRC itself can come up with viable ideas in the UK, that could
make a difference, but not quickly.

The other review, into joint audits, is not a popular one. Though Mazars has
been enthusiastic in its support, the Big Four openly point to the fact that
Parmalat was joint audited, and say it will be a disaster.

‘When audit quality is at the top of the agenda, it flies in the face of
trying to do the best high-quality audit, which is best done with a single
network,’ said Richard Bennison, head of audit at KPMG.

Some Big Four figures argue privately that there is no problem with the
dominance of the Big Four at all, and that four firms are enough. The more
diplomatic concede that they would like to see a fifth ­ and just to make the
problem go away ­ that would clearly be welcome for them.

There is no doubting one thing, that the UK, as so often, has led the way in
opening up these debates. With the US only recently firing the starting gun and
the EU borrowing many of its legislative ideas from Paul Boyle, the FRC may be
congratulating itself on a job well done.

But if global attempts to solve the problem reach a similar impasse to the
one the UK has reached, and the market is given nothing more than warm words
about waiting for ten years or more for real change, the clamour for more
radical solutions may well grow.

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