US enters audit market wrangle
Who would have thought that five years on we would still be dealing with the fall out from Enron? But we are
The latest round came last week when US Treasury secretary Henry Paulson
announced that regulators on the other side of the Atlantic would now conduct
their own review of the audit market. Former SEC chairman Arthur Levitt will
head the project alongside a former SEC chief accountant because, as Paulson
says: ‘We now have fewer major accounting firms, and legitimate questions about
the sustainability of the auditing profession’s business model.’But what will US
regulators do? It’s almost certain they will conclude four big firms are not
enough.
But what next? Over here the Financial Reporting Council has worked hard with
stakeholders in trying to gain consensus, which culminated just this month with
15 recommendations some of which are aimed at encouraging investors into the
market to create new international firms.
But the FRC measures don’t go much further than ‘encouraging’ a good
approach in itself because it neatly satisfies the philosophy of no market
intervention. But what will happen in the US? US authorities have a history of
heavy handed prescriptiveness, but things are changing.
Christopher Cox, current chairman of the SEC, is known for preferring
principles over rules and was also impressed by the FRC’s way of dealing with
the audit market. But can he convince Levitt, much more of an old school rule
maker?
Whatever happens, the Big Four are likely to go through the process of trying
to convince US regulators that a Big Four is sufficient, though obviously not
ideal. But in the home of the ultimate free market that might be a much harder
argument to make stick.