Hardeep Nahal, Herbert Smith

The FRC’s work on choice in the audit market is continuing, the latest installment being the publication of the report of the Market Participants Group.

The MPG has been looking at what steps might be taken by stakeholders to promote greater choice or the exercise of existing choice at the top end of the audit market. The FRC’s work must be considered in the wider context of the same issue in other major capital markets, particularly the US.

Notwithstanding the Oxera report for the FRC published last year, views still vary as to whether there is a problem. If there is, stakeholders are divided on what the objective should be, never mind how and when to get there.

The advantage of the MPG is that its members are those stakeholders most actively engaged in the market, but from constituencies, which are likely to avoid any damaging attempt to impose a solution that cuts across the current market situation. Heavy-handed intervention would have unintended consequences, with no guarantee that the audit market would improve.

The proposals in the MPG report are, therefore, generally proportionate: as a package they attempt to smooth the path for greater competition at the top end of the market. The MPG recognises that changing the current situation will take some time – and there is a question over what period of time and what changes the FRC would see as indicators of success – and that all participants will need to be involved, not just regulators. For example, the mid-tier firms may need to invest more in involvement in standard-setting.

Some suggestions are arguably already in progress: there is a call for greater transparency, even though the Big Four firms already issue plc-style annual reports in the UK.

We need to bear in mind the purpose of the Combined Code, which is not designed or suitable for professional service firms. We need to look at what stakeholders want, and what the consequences of greater disclosure would be – will they actually lead to greater competition, choice, outside capital or new entrants?

Those suggestions in the report that cause most concern are those whose unintended consequences might put audit quality at risk, when audit quality must be the overriding concern. Using firms from more than one audit network can be problematic, Parmalat being a case in point.

Hardeep Nahal is a litigation partner at Herbert Smith