RSS feedsThe recent Oxera report on the state of the audit market has been described as contentious and even controversial in relation to the issue of choice and competition. I think that it has merely set out the playing field on which this topic will be discussed and provide a common ground for the debate by articulating the issues that are generally known.
Much more interesting has been the reaction to the Oxera study by the Big Four, mid-tier firms and others on whether the audit of large global organisations will ever be anything other than the domain of KPMG, Deloitte, E &Y and PwC.
The recent comment by the Financial Reporting Council (FRC) is telling, as this extract from its discussion paper reveals: ‘Increased choice is only likely to be achieved if the propensity of non-Big Four or new firms to enter the market is increased, together with the propensity of large company audit committees to purchase services from these firms.’
There is also the dual crux of the issue of choice and competition. On the one hand, there is the choice that global organisations make, and, on the other, whether non-Big Four firms want to or can compete.
In the former dimension, it is readily accepted that large organisations are looking for the buying criteria of geographic coverage, consistency, quality, technical proficiency and brand when choosing their audit services provider. These elements have been built up over generations by the Big Four on a scale sufficient to meet global requirements. This has taken significant investment from these firms and, in my view, it is this investment that is the main barrier to entry for non-Big Four firms into this market sector.
What about PartyGaming and BDO? Well, the business model for this company is based on a virtual internet economy not requiring local country presence, application of local country GAAP, and so forth – quite different from an oil and gas or utilities company that has many significant physical assets located around the globe that may be governed by local laws and regulation. In other words, it is an anomaly.
Turning to the propensity of non-Big Four firms to enter the market, therein lies the rub. The ability and desire of mid-tier firms to offer the key elements of clients’ buying criteria, identified above, requires such firms to take a long, hard look at how and whether they are able and willing to raise the investment capital necessary to compete against the Big Four.
Mid-tier firms that operate a loose federation of offices under a common brand will tend to be short-term focused on local office profitability, rather than on medium-to-longer-term growth – this is a natural consequence of the partnership structure. At Parson Consulting, we are a wholly owned subsidiary of a listed company (Management Consulting Group plc) and have opened three offices in Washington DC, Paris and Sydney in the past year, because the financial investment and time that it will take these offices to turn profitable will be absorbed by the corporate structure – how many mid-tier firms are able and willing to adopt this strategy?
An additional issue is that of audit liability. While there has been some clarity on the nature of this, which seeks to encompass a range of options, from liability caps to proportionate liability, if the Big Four aim to set caps that are high, this will be another barrier to mid-tier firms being able to offer audit services to large organisations.
So where does this leave the mid-tier firms? The ability to make significant investment to meet clients’ buying criteria is key, yet it is inhibited by the partnership structure. To compete effectively against the Big Four will require imagination, ingenuity, intensive lobbying and changes in regulation and legislation. But, above all, it will require a desire to think and act for the longer term. In the absence of these, the status quo is likely to remain for the foreseeable future.
Kevin Narain is European managing director of Parson Consulting
