Big Four-only audit clauses ‘should be banned’

The UK accounting industry should have intervened more to increase audit
choice by banning ‘Big Four-only’ clauses from bank audit contracts, the
departing head of BDO Stoy Hayward has said, as the row over audit concentration
flared up again.

The mid-tier firm released provocative new research, carried out by the
London School of Economics, showing a direct link between concentration in the
audit market and increases in fees. It is the first research to link
concentration and increased fees without hedging around the point.

The biggest firms have proved extremely sensitive to the suggestion,
insisting there is strong competition in the market.

‘It’s difficult to prove distortions in the market place. But the best
evidence as to whether a market is operating correctly is to look at pricing,
which is an indication of underlying distortion.

‘We’ve been saying this for some time, but people always asked us to prove
it,’ said BDO managing partner Jeremy Newman.

The research suggested a fall of 10% in the Big Four’s market share could
lead to a drop of 7% in audit fees. Newman said the Market Participants Group
ought to have banned ‘Big-Four-only’ clauses.

The research was greeted with dismay by the Big Four. Deloitte audit partner
Martyn Jones said the report failed to ‘factor in…regulatory change’.

‘Our belief is that the report is seriously flawed. Before the Andersen
demise, we had five firms, the largest three had a bigger concentration than the
Big Four have today. When you look at the numbers, it’s not necessarily the case
that there’s been a continued drive towards more concentration,’ he said.

‘All this report shows is a 2.5% increase in audit fees. Why the fuss over
that?’ another Big Four partner said.

Financial Reporting Council chief executive Paul Boyle played down the
concerns. ‘If you look at what the cost of an audit is, and [that as a]
percentage of the total cost base of a large company, you will find it is
actually really small. Quality and availability of audit services are much more
significant than price,’ he said.

KPMG head of audit Richard Bennison said: ‘For every audit we tender, there
is competition.’

Further Reading:

Four control directly linked to higher audit fees

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