Audit choice dilemma may not be resolved for ’10 to 15 years’

Sir Mike Rake

Sir Mike Rake, chairman of BT

One of the country’s most senior accountants has said it could take as long
as 10 to 15 years before another firm grows large enough to resolve the lack of
audit choice facing UK companies.

Watch the full interview with Sir Mike Rake at

Sir Mike Rake, former international chairman of KPMG and now chairman of BT,
said the appearance of a new big firm would depend on settling liability issues
and being able to grow with big clients.

‘It’s 10 to 15 years – it’s going to take time. If we can create the right
environment for firms to invest, creating the environment from a liability point
of view, its worthwhile for firms [outside the Big Four] to grow with their

‘We [the Big Four] grew with our clients, and then expanded our capability as
the markets evolved,’ Sir Mike told Accountancy Age in an exclusive

However the Financial Reporting Council’s chief executive Paul Boyle said
there were already signs in the market that things were changing and
recommendations made in the recent Market Participants Group (MPG) report on
audit choice would have an effect as early next year. He said other changes
could be as close as four years away.

Sir Mike’s comments came as the MPG published 15 recommendations to resolve
the lack of choice within the UK audit market. Sir Mike also disagreed that
investing in the mid-tiers, as previously suggested by the FRC chief, is a
solution to greater choice. ‘The answer here in my personal view is that it is
not an external capital issue. And there are restrictions and other issues to do
with independence.

‘I can’t quite see why that would be attractive to anyone,’ Sir Mike said.

But Boyle defended his views on buying into firms.

‘If you’re going to bring about a significant increase in capacity to firms
outside the Big Four, then there needs to be investment from somewhere. That
could either come from firms or existing resources or outside.

‘If you insist that investment comes from firms’ existing resources, you will
depress earnings of those firms, which will make it more difficult to attract
and retain the high calibre of people needed to make the firm successful.

‘The big firms are investing in their capabilities and can do so from
existing profitability with less need for outside capital,’ Boyle said.

Big break for big four

The Big Four’s audit revenues have increased to £2.5bn (from £1.8bn) since
the inception of the Financial Reporting Council’s study into audit choice began
two years ago.

The £700mincrease constitutes the approximate amount made by the rest of the
top 50 firms together, from audit in one year.

In 2008, the FRC is to begin its consultation on the possible effects of
changes to audit firm ownership rules. The MPG recommendation states this would
be subject to there being sufficient safeguards to protect auditor independence
and audit quality.

Watch the full interview with Sir Mike Rake at

Related reading