How will greater choice affect the audit market?

End the Big Four prejudice

A FRC/DTI study has provoked widespread debate on choice in the public
company audit market.

I welcome this study, but market-led solutions are generally preferable to
new regulation and the key to this debate is to ensure that investors are
engaged and that their needs from the audit market are made better known.

Leading investors and their representatives, such as Hermes, the ABI and the
NAPF, should be applauded for entering the debate on improving financial
reporting and audit quality. Increased choice in certain tiers of the audit
market is one way to help maximise audit quality.

While recognising the audit quality and service that a leading firm outside
the Big Four can provide, many public companies will be put off appointing one
for fear of investors expecting a ‘Big Four name on the ticket’.

Over 20 years, this prejudice in favour of the then Big Eight, now Big Four,
has arisen based on perception rather than hard evidence of investor wishes. The
public company audit market is tiered and different tiers are best served by
different types of firms. Only 100 or so UK companies – a thin slice of the
total pie – are so vast that they are best served by the capacity offered by a
Big Four firm.

For the remaining 2,500 publicly quoted companies, other audit firms outside
the Big Four, especially those that have invested in sector specialisms, can
also provide quality audits.

Choice, and thereby audit quality, could be improved by investors making
public their views on where those tiers are drawn. Then companies that wish to
benefit from the audit quality and service of a non-Big Four firm could do so
based on investors’ actual, rather than supposed views.

Such market-led reform based on investors’ actual wishes is likely to result
in greater choice in the audit market outside the largest companies. While there
is no quick fix for these global companies, the focus should be on improving
audit quality and not choice for its own sake. That is no reason to put off
improving the choice and audit quality available to other tiers of the market.

Michael Cleary is CEO of Grant Thornton UK

Size isn’t everything

Prejudice is an ugly word. But it’s an accusation levelled at the accountancy
profession far too frequently – most typically in employment and promotion

Now, though, investors stand accused of perpetuating an institutional
prejudice against non-Big Four firms when it comes to sanctioning audit
appointments by companies.

It’s a charge they refute, with the National Association of Pension Funds
(NAPF) telling Accountancy Age that it is interested in good returns, not the
size of an auditor’s corporate HQ. But the stats hardly support such a claim.

After all, only last month, after its client PartyGaming entered the FTSE100,
BDO Stoy Hayward became the first firm outside the Big Four to audit a FTSE100
client since Baker Tilly audited Securicor in 1998.

The sentiment among institutions and audit committees is that a Big Four
auditor represents the safest choice. They will also be looking for the
involvement of a ‘Magic Circle’ law firm and a leading ‘bulge bracket’
investment bank. In these increasingly litigious times, wouldn’t you look for
that sort of third-party verification?

Well, perhaps that is starting to change. PartyGaming may be a one-off, but
if online gambling and other new sectors become more prominent and remain
willing to look beyondthe top tier for their adviser pool, the trend will grow.

Similarly, with accountants’ workload expanding all the time, the Big Four
are increasingly finding themselves conflicted out of working for their
traditional power base.

That’s granting the mid-tier firms exposure to clients that might otherwise
have stayed off-limits.And then there is the threat of a further reduction in
the Big Four.

Ernst & Young and KPMG have both survived life-threatening tests this
summer. No one wants to see that pool diminish. Indeed most want to see it widen
– which requires companies and their investors to be more open-minded about
mid-tier firms.

It may be more by default than design, but Big Four prejudice might soon end.

Damian Wild is editor of Accountancy Age

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