BusinessCorporate FinanceFRC aims to keep the peace as report reignites audit debate

FRC aims to keep the peace as report reignites audit debate

The debate on quality and competition in the UK audit market exploded this week after the Financial Reporting Council released the responses to its paper on the topic

Paul Boyle, the FRC’s chief executive, said he was ‘very grateful’ for all
the contributions and that he was looking forward to ‘hearing the views of
stakeholders’ at a FRC public meeting on 18 September.

But after working through the responses, and having watched the vicious
verbal scrap that erupted between shareholders and firms leading up to the FRC’s
formal announcement, Boyle could be forgiven for looking forward to next month’s
gathering with trepidation.

The desire to control debate on audit quality is strong. For all parties
there is much to lose and much to gain from its outcome. Boyle and the FRC are
going to have their hands full making sense of it all.

It was the response of the Association of British Insurers that kicked off
the fury in earnest. The ABI, whose 400 members account for a fifth of the
investments made on the London Stock Exchange, shocked the investment community
with the proposal that regulators should step in and force the Big Four to shed
clients if they became to dominant.

‘It should be clear to the large accounting firms that, if their share of the
market is deemed to be excessive, they will be obliged to divest part of their
business,’ the ABI said in its response document. The threat of action by the
competition authorities would provide a strong incentive to the development of
choice.’

It didn’t take long for the Big Four to strike back.

Peter Wyman, head of professional affairs at PricewaterhouseCoopers, said the
ABI’s response was ‘brainless’ and ‘from a different planet’. Deloitte’s chief
executive John Connolly maintained that ‘artificial actions are not the answer’
and KPMG said forcing clients to drop a Big Four auditor ‘clearly contravened
good governance’.

And it wasn’t just the Big Four and ABI that were eyeballing each other. The
mid-tier firms also joined the debate. BDO Stoy Hayward said the Big Four had
used the threat of voluntary withdrawal from the audit market as a bargaining
tool to negotiate liability reform.

David Herbinet, head of public interest markets at Mazars, criticised the Big
Four for supporting regulation when it suited them, but fighting it when it
could have a negative impact on their businesses.

‘The Big Four support regulation such as proportionate liability, because it
suits them, but then shy away from market regulation when it does not,’ Herbinet
said.

The lines have been drawn in the sand. The battle for control of the UK audit
market has officially begun.

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