PracticeAuditBig Four split backed by top UK investor

Big Four split backed by top UK investor

Big Four firms could be moulded to create a Big Eight, suggests Standard Life's Guy Jubb

The Big Four could be organised into as many as eight firms to increase competition and quality, one of the UK’s most influential investors has suggested.

Guy Jubb, head of corporate governance at Standard Life, told a Lords inquiry into the audit market that eight was a “comfortable number” of competitors from which clients should be able to choose an auditor from.

“One can have a larger number of networks beyond five or six… it is their gift to organise themselves,” said Jubb.

But he shied away from suggesting mandatory intervention towards a set number of firms. “We should not stipulate what the number should be,” he said.

The latest evidence session of the Lords Economic Affairs Committee heard investors disagree about some of the issues surrounding mandatory rotation of auditors.

Iain Richards, regional head of corporate governance at Aviva Investors, said mandatory rotation “risks being detrimental to audit quality”.

New auditors require a period of learning about their client, then provide a full service before new audit partners are then brought in. “You risk seeing three years of lower quality for [every] four years of full service,” said Richards.

Rotation would only keep audits with the Big Four, Richards also suggested.

“Rotation would need to be thought out very carefully in terms of potential impact. There’s greater opportunity to expand market dominance [beyond the FTSE 250],” said Richards.

But Paul Lee, a director at Hermes, disagreed that changing an auditor lowers quality.

He cited Audit Inspection Unit evidence that audit quality improves in the first couple of years of taking on a client.

“The firms put in a lot more work to make it work,” said Lee.

The investors said that mandatory tendering was a favourable option.

“This would drive people to look at audit quality and price,” said Lee.

 

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