PracticeAuditThe loneliness of long distance audit reform

The loneliness of long distance audit reform

 

Fascinating comments yesterday from employment minister Ed Davey (pictured) while appearing before the Lords committee looking at audit reform. He said that he has serious concerns about competition in the audit market, but wanted to persuade companies to use auditors outside the Big Four. If that didn’t work, he would conside some other largely unspecified measures.

These remarks are interesting for a couple of reasons. Firstly, Davey essentially offered government endorsement of the abilities of non-Big Four audit firms. Since the issue has been on the agenda of regulators, around the time of the demise of Andersens, no government minister has gone that far to signal that big companies should be shopping further afield for their auditors.

But Davey stopped well short of saying any intervention would take place. Only when other measures had failed would he countenance such a move.

Cynics among you (doubtless not Big Four) might wonder when someone will call the “failure”.

A brief history of trying to cajole some change in the audit market begins most recently with the Financial Reporting Council in 2006 and its founding of the Market Participants Group, the conclusion of 15 principles, or measures, for change and the quite religious reporting on the progress towards implementing those measures. This was all sterling work and based on some good thinking and decent intentions.

But the success of these particular measures should be judged against results and a keen observer might well conclude that the sum total of change since all this work began is, well, unobservable, principly because no measurable change has taken place. Even the government, in Davey, achnowledges that the Big Four remain dominant.

Perhaps the UK government is relying on the EU to do the hard graft. It’s quite possible that Europe will move to change ownership rules for audit firms, which might allow a fresh influx of capital. (That said the mid-tier firms have recently made it clear they don’t believe capital is the issue).

What would be useful is if Davey were to explain when and how he’s going to judge that steps to change the audit market have failed and what the options are if he does. An observer might then decide that someone has a clear plan of action. I remember that the FRC said it was looking for change in the medium to long term but the journey is beginning to look like a marathon.

 

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