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.
Further powers are being sought by HMRC, but it is ‘failing’ to use those it already has, such as Conduct Notices, says RPC
HMRC breaches client confidentiality; and partner profits fall at EY. These stories and more discussed in Friday Afternoon Live
Two new audit partners have been appointed at the firm BDO in its audit practice following continued growth and investment
"The whole idea of HMRC officials supplying confidential information about individuals to the media on a non-attributable basis is, or should be, a matter of serious concern," say Supreme Court judges