FRC report unlikely to affect audit choice

Financial Reporting Council Markets Participants Group

& Young
says that, although some of the
Reporting Council
’s recommendations could bring valuable improvements to the
overall effectiveness of the audit market, some might have no effect at all on

‘Indeed, in some cases, while creating a more effective competitive market,
the recommendations may actually reinforce the confidence and trust placed by
the market in the largest firms,’ Gerald Russell, E&Y senior partner, said.

‘One of the more far-reaching recommendations is the proposed change in audit
firm ownership. It is not clear how this could advance the development of
additional global networks, as significant investment decisions tend to be
multi-geographical in scope.

‘The MPG (Market Participants Group) has not discounted its recommendation
for the raising of equity to improve choice in the audit market – which is
surprising. In our view capital could not be raised to provide an adequate
reserve for even one catastrophic loss, as the risk would be too great for a
market-driven return on investment. Therefore, it would be like asking investors
to take a long-term view on a high-risk investment for a relatively low return.

‘Investors from outside a firm could inadvertently reduce choice, constrict
competition, create conflicts of interest and breach independence rules, which
have the potential to preclude their audit businesses from pursuit of certain
clients for audit services.’

Further reading:

Market Participants Group unveils its recommendations

Tackling big four dominance

Related reading