With several large accountancy firms having expressed an interest in picking up all or parts of the embattled Big Five firm Andersen, competition issues and the future quality of audits is increasingly being examined by both the profession and onlookers.
The prospect of the Big Five becoming the Big Four has intensified calls for tighter restrictions on firms, such as statutory auditor rotation, hiving off consultancy divisions and a ban on firms offering non-audit services to audit clients. But the profession refuses to back down on its claims that such recommendations are not the panacea.
Alan Reid, chief operating officer at KPMG, this week told a gathering of partners that the firm did not think auditor rotation was the solution. KPMG, like most of the large accountancy firms rotate audit partners every seven years which they say ensures independence of mind.
However, observers say that by banning such services, accountancy firms will have to focus once again on their raison d’etre Ñ auditing. If this were the case firms would have to raise their audit fees and thus maintain the high standard of auditing, is the reasoning behind these demands.
But Rodger Hughes, a senior partner at PricewaterhouseCoopers, the world’s largest accountancy firm, warns against such moves. Hughes says: ‘I don’t see competition lessening if five goes to four. No one has demonstrated any serious failings in the structure of audit. In a perverse way what has happened (with Enron) will improve audit quality.’
But, if the Big Five already dominate the audit market in the FTSE-100, how would the prospect of just four accountancy firms carrying out audits for the UK’s top companies sit with regulators and competition authorities in Britain and Europe?
Companies like Canary Wharf (above), for one, would be left seeking a new auditor.
Karel Van Miert, former competition commissioner who oversaw the PwC merger, this week said: ‘I remain of the opinion that five is the minimum required to ensure enough competition.’
It is thought Mario Monti, his successor, will share this view.Andersen could however use the ‘failing firm defence’ under which companies faced with financial ruin are exempt from competition laws.
Under the UK’s Fair Trading Act a merger has a very broad definition, so it could also mean that the Office of Fair Trading would take a look at any further consolidation in the UK market place.
An important facet in the argument against forcing firms to depend wholly on audit services is their ability to attract quality people into the profession to maintain quality audits. ‘If you put constraints on us it is a dangerous path to tread. At the extreme you make audit unattractive to quality people,’ warns Hughes. ‘In the UK we’ve been very successful in attracting quality people into audit. Damage that and youåre in trouble,’ he said.