Consider all contenders
There's no reason for audit's catwalk queens to be limited to four
The Big Four firms currently audit all but one of the FTSE 100 companies and
97% of the FTSE 250.
This concentration of Big Four audit services to listed companies has raised
concern among investors and others: could reduced choice and competition lead to
erosion in audit quality? What about potential conflicts of interest, rising
audit prices, the Big Four’s influence over government lobbying for the
industry? What happens if one of the Big Four had an accident of the scale we
saw with Andersen?
The Financial Reporting Council – the accounting and auditing regulator –
began the debate on the dominance of Pricewaterhouse-Coopers, Deloitte, KPMG and
Ernst & Young late last year. This week, the ABI investment committee, which
represents shareholders controlling nearly 20% of listed shares, has added its
voice to concerns, with a statement encouraging companies to consider all
contenders when selecting an auditor. In doing so, it wishes to promote greater
diversity and choice.
Investors have become aware that companies believed they would not approve of
a non-Big Four auditor. We at the ABI investment committee, therefore, wish to
make it clear that our members do not consider it appropriate or necessary for
the selection of a Big Four auditor to be the default choice for every listed
company.
The committee believes that companies should periodically review the
desirability of appointing a new auditor. When companies do so, they should
consider all possible contenders, including the appointment of an auditor from
outside the Big Four. If audit committees are uncertain how their choice may be
received, shareholders are happy to be consulted.
Investors do not wish to be prescriptive, and we recognise that each company
should make a choice that reflects its own particular circumstances. The ABI
investment committee believes that this week’s statement is only one of many
measures that are needed if market participation is to gradually expand.
However, we hope this clarification will contribute to a reduction of
concentration of audit provision by the Big Four, particularly for companies at
the middle and lower end of the FTSE All-Share, without a sacrifice in
standards.
Peter Montagnon is head of investment affairs at the Association of
British Insurers