So the divisions are now out in the open. Yesterday, representatives from the mid-tier firms sat before a committee in the House of Lords and pleaded their case for regulatory intervention in the audit market so they could participate more competitively. In essence their argument was that they were not being held back by an inability to invest – they could make funds available. What was stopping them from putting their money where their mouth is was the institutional prejudice that means that, even if they do invest, they could not expect a return on their money. Simon Michaels from BDO called for an outright ban on restrictive covenants – the sneaky clauses placed in credit agreements by banks that restrict their clients to Big Four firms only.
So far the regulator, the Financial Reporting Council (FRC), has acknowledged only anecdotal evidence of their existence. That argument has not been sustainable for some time. Through roundabout ways even Big Four firms have conceded they are used.
But what’s interesting now is that the Lords inquiry has produced a polarisation among firms with the Big Four on one side and the mid-tiers on the other. Of course, they’ve been in this position before and its been out in the open before. But I think there’s a new zeal among the mid-tier firms for their argument. I suspect they sense that they are on the front foot while the Big Four are increasingly in defensive mode. They will have been buoyed, no doubt, by the tone of the questioning from the Lords which has indicated some sympathy with the mid-tier position and even that the big auditors should have been in a position to do more during the crisis.
This is important because of the political context. Yesterday, the committee chairman, Lord Young, said during his questions that the previous efforts by the FRC to open up the audit market had “clearly failed”. If his eventual report says something needs to be done, previous measures backfired, all he can do is call attention to what he sees as a problem. But the current coalition could take notice. The attraction? It would be seen to be to dealing with the “failings” of the previous Labour regime. A not insubstantial icnentive in the current climate.
Add in this: previous FRC policy didn’t work and the future of the regulator is up for grabs as the coalition considers what to do with the quangos. Vince Cable at the department for business could be tempted to argue that the FRC should go, its functions reabsorbed into his department and an interventionist set of policies introduced to rebalance the audit market away from the big Four for whom he has no great love. A Lords report drawing the right conclusions would give him some justification for doing something like that. The FRC and the Big Fur must be braced for the worst.
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