Is the debate about widening audit choice redundant?
Mark Harwood, head of corporate governance, Baker Tilly
I don’t think that it is redundant at all. There are two elements to the
Financial Reporting Council’s work in this area.
The main thrust to what they have been talking about is the risk of exit, the
risk of a Big Four firm exiting and then the issues for the capital markets as a
result of that.
The second point is the issue of competition. Is there a real lack of choice
within the market at the moment? We think that there is a great deal of choice,
except in some very specific areas where the mid-tier does not really operate.
There is choice out there – but there are issues over persuading people to
make those choices at the moment.
We are banging on a few doors and talking to people. If we look at the FTSE
250 market, a lot directors and chairs of audit committees probably do not have
relationships outside of the Big Four. We need to encourage them in that.
We want to encourage choice and we want to encourage people to have the
information available to make a choice that is appropriate to them. At the
moment because of the domination that the Big Four have over the market, perhaps
those choices are not really as apparent as they should be in the market.
I had dinner last week with a FTSE 100 FD and he was making a very conscious
effort to look beyond the Big Four and he was grateful, I think, for firms such
as our own, talking to him about what we can do.
Before he had that discussion, he perhaps had the perception that we weren’t
playing in the marketplace that we were. We certainly don’t see the liability
issue as a disincentive.
Is it the responsability of the regulators or the market to find a
Patricia Peter, head of corporate governance and employment,
Institute of Directors
I really don’t see how one could deal with it other than via the market.
Would you say to the Big Four that they all have to divest themselves of x
number of clients? They just can’t do that.
I agree that it will not be a quick fix solution, but raising the debate is
making directors and audit committees and audit committee chairs think about the
issue. They have to ask themselves: ‘What do we need? Who should we be talking
We do quite a lot of work with mid-tier firms. They are putting themselves
about a lot more. They are demonstrating to the people who will be making the
selection their ability, the scope of their services, the depth of their
knowledge and experience, their technical ability, their research facilities and
I think most directors do want the debate to occur. It seems to have been
more of a problem in the past, that some companies felt that they were pushed in
a certain direction by outside forces. We do look at where the concentration is
and whether it is necessary for all those companies.
We need everybody to be looking at how the market operates so there aren’t
hidden pressures on companies. If the debate continues that may well have
beneficial results without regulatory intervention.
We do not want regulation. It is not for regulation but it is for all those
involved in the market to recognise that there is life outside the Big Four. We
certainly would not advocate regulation in this area. I think it was good that
the FRC raised the debate but I wouldn’t want them to be intervening in
providing the solution.
Could another large firm emerge to challenge the Big Four?
James Barbour, director of accounting and auditing, ICAS
We have a situation where we have four at the moment but there is no
immediate solution to providing five or six.
There is reasonable competition in most areas. There are certain areas where
we would like to increase the competition but over a period of time things may
develop and we may get back to a situation where we are more than four large
There are other issues to growing another large firm that are probably more
significant than the potential liability: the resource issue, for instance, and
the speed at which you can safely grow a firm.
Is choice a problem? Certainly people would refer to it. But, ultimately, it
really is up to the audit committees of these companies to choose. The auditors
may feel there is pressure from the City and the investment community to have a
certain auditor for a particular company.
But we believe that it is up to the audit committee to decide which is the
best firm for the specific service that they need.
We also believe that there is a reasonable level of competition except in
certain areas, for example financial services. But if one of the big firms were
to leave, where would that leave us? That again that is another reason why this
debate should continue.
I know a lot of the firms outside of the Big Four are now starting to pick up
non-audit work from a lot of these companies and we would see this as an
evolutionary, not revolutionary process, in that they will pick up this work and
then at some stage be appointed auditors of those particular companies. Possibly
not in the shorter term but moving forward.
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