Ownership reform is no panacea, but it’s a start

Gavin Hinks, AccountancyAge

That’s the profession’s blunt opinion after Oxera published its
EU-commissioned report last week.

The report concludes that a change in the current rules might encourage
outside investment in audit firms and help alleviate the lack of choice for
large audits. In fact, it identifies restricted ownership as a major obstacle to
investment, because it increases the cost of capital and the expected rate of
return before an investment is made.

Accusing the report of being ‘no panacea’ is no criticism, however. The Oxera
authors acknowledge that changing the ownership rules alone is no answer, it has
to be in tandem with reform of liability. Now that the report is written it’s a
fair bet that the EU will push ahead with modifying the current rules. And the
change will put in place another plank that will build the reform needed to
change the audit market.

In the UK, liability reform is due to arrive in April next year and the
Financial Reporting Council has put in place some recommendations to ‘promote’
audit diversity. But don’t expect dramatic change any time soon. Ownership
reform is likely to have an effect only in the medium- to long-term.

That perhaps is a big-time window in which an event might happen to create
the kind of audit chaos that financial regulators the world over dread. Having
said that, only one global firm has ever completely disappeared through
reputational damage, which means we have some time. What’s also needed is a will
to build another big firm. And that will only come if the risk looks manageable.
Overcoming that obstacle might be the most difficult of all.

Related reading