An end to innuendo

The report from the FRC/DTI on competition and choice in the UK audit market
is very welcome. This (rather long) report gives a very good situational
analysis in the UK. For too long, there has been much innuendo about the
perceived difficulties; this research now grounds what the issues really are.

Indeed, it was the AQF working party that recommended research should be
undertaken before any appropriate response, whether regulatory or market driven,
could be made.

The Oxera report appears to achieve just this. It is particularly pleasing
that the findings are not a huge shock and in many respects confirm what many
people feel: namely that there is not a competition issue as such but that there
is a choice problem for businesses of a certain size, industry segment and/or
geographical location.

This choice problem has been aggravated recently by the stances taken
regarding actual or perceived conflicts of interest, particularly in an M&A
situation.

The report notes the barriers to entry are indeed steep. But these barriers
stem from questions of geography, skills and economics rather than any
anticompetitive moves by the Big Four.

I admire the report for not immediately proposing any regulatory responses to
this conundrum. Instead, it paves the way for interested parties to have an open
debate, one that can now be based on established facts.

The only difficulty I have is with the suggestion that higher concentration
of firms into four has led to increased audit fees. The cost of regulation
arises directly on companies having to adopt the whole gambit of international
accounting and its increasingly detailed disclosure requirements.

And the overhead costs of training staff, applying appropriate technical and
quality control procedures, updating audit methodologies, participating in
external reviews, meeting higher premiums for insurance are huge.

As with any business, costs need to be factored into the overhead recovery. I
don’t believe any concentration has led to pricing increases. If you had a Big
Six, or even a Big Eight, not all would probably participate in a beauty
contest.

Any regulatory response will be difficult to determine. But this report paves
the way for a sensible and open discussion. I consider it is a most welcome
start to the debate.

Gerald Russell is senior partner, London at Ernst & Young