Four’s company, five’s even better

After the publication of the Oxera competition report and last week’s
stakeholder meeting, it’s clear that this particular conundrum is one that will
vex regulators at the FRC, Big Four partners and government ministers for some

The gist of the report is that more audit competition needs to be produced,
because just having four firms servicing the needs of the FTSE 350 is not

It would be dangerous, however, to enter the next phase of working out what
to do with the assumption that the barriers for entry to a ‘Big Five’ club are
impossible to overcome. With that in mind, it’s worth taking the time to gently
challenge some of the ideas doing the rounds that might just reinforce that kind
of approach.

Firstly there’s the idea that four is enough, though five would be better as
long as it’s not at the expense of audit quality. Four firms could only be
argued to be just enough, because if a single firm collapses audit would be
thrown into crisis. And why should five threaten the quality of audit? A fifth
member of the elite club would not increase the risk to quality if the right
regulatory framework were in place.

Unless, of course, you argue that number five would only come by the growth
of a poorer quality mid-tier firm. The candidates would argue that the issue is
investment in global structure and systems, not the skills of the staff.

And if the investment issues were overcome, then the right kind of quality
would follow.

Investors worry more about the growing possibility of even more protection
for auditors as a means of bringing new entrants to the top flight. That’s
likely to be the real battleground here.

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