Mandatory audit rotation ‘further entrenches’ Big Four

Mandatory audit rotation 'further entrenches' Big Four

Mandatory audit rotation could force Big Four firms further down the market rather than open top audits up to other providers, claims EY audit partner

THE MANDATORY ROTATION of auditors every ten years will further entrench the Big Four’s domination of the market, according to an eminent audit partner at EY.

Rather than the intended purpose of opening the FTSE 350 market up to more audit firms such as Grant Thornton and BDO, EY head of audit Hywel Ball told Accountancy Age he believes mandatory rotation is reinforcing the Big Four’s dominant position in the large listed market while also forcing them to tender for clients further down the market.

Greater churn at the top of the market has been coupled with companies’ preference to remain with Big Four auditors, while also causing the firms to cast their sights downwards, Ball said.

“The danger I think we’ve got with this market is that the Big Four will go down the market and compete for accounts traditionally held by the non-Big Four,” he said. “One of the underlying drivers of the regulation was to improve choice in the market, but I worry that that’s not necessarily going to happen.”

Audit rotation net widens

Ball cites the EU’s Public Interest Entities (PIE) regulations as another force acting the Big Four’s favour, which brings more companies and entities under the auspices of mandatory rotation.

PIEs are defined by the EU as “all entities that are both governed by the law of a member state and listed on a regulated market”. It adds the regulation takes in “all credit institutions in the EU”; “all insurance undertakings in the EU,” and “entities designated by member states as public-interest entities”.

Under the EU’s audit directive and regulation, PIEs are compelled to put their audits up for grabs every decade and swap auditors every 20 years, in addition to limiting the level of non-audit fees.

“It forces the tendering activity downwards because [everyone caught by PIE] has got to tender,” Ball explained.

“It won’t just be listed companies, there’ll be other companies that will now be caught by the EU legislation in terms of having to tender. It’s opening up the market and actually allowing the Big Four to go into areas they traditionally wouldn’t.”

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