RSS feedsThe Big Four say they welcome the idea of more audit choice for large companies. But do they mean what they say? After all, the concept of greater audit choice for big business implies that the top firms would lose audits, market share and profit.
In this debate, the subject of low-balling has always been the elephant in the corner: something that is really obvious, but which has never been properly discussed.
Priced out the market
The ultimate purpose of predatory pricing is to sell goods or services at artificially low prices with the intent of driving competitors out of the market, or to create a barrier to entry into the market for potential new competitors. The predatory pricer then has fewer competitors or even a monopoly, allowing it to raise prices above the level that the market would otherwise bear. Audit choice and low-balling are two sides of the same coin.
It is not in the interest of any of the major players to open up the question of predatory pricing. The Big Four audit firms don't want to discuss it, nor do finance directors. So the audit trail on low-balling goes cold. While some accept low-balling as an absolute fact of life, others deny that it ever happens.
Certainly, the documented evidence on low-balling is rare, but every few years there is a low-balling tale or accusation from someone who ought to know. And this keeps alive the idea that absence of evidence does not equate to evidence of absence.
The latest explosion came from Jeremy Newman, managing partner of BDO Stoy Hayward, who is leading a sustained assault on the Big Four. A clearly exasperated Newman has put into the public domain the story of a due diligence job for which his firm quoted. Despite the fact that the maximum fee level BDO asked for was a third of the initial price of the company's auditors, the work eventually ended up being performed by the incumbent for around 10% more than BDO's top quote.
It is tempting to dismiss the tale as an example of a canny FD using a different supplier as a stick with which to beat the incumbent - and presumably favoured auditor - into providing the service at a more reasonable price. Or is it, as Newman suggests, predatory pricing designed to force out his firm from competing in certain segments of the marketplace?
Under attack
Significantly, Newman also claims that the Big Four firms are increasingly targeting BDO clients - and presumably the other mid-tier firms - by promising significantly reduced fees, which the incumbent is forced to at least match, or risk losing the work.
Even smaller firms feel the threat of low-balling. These independents find their biggest clients - significant private companies, but not quoted entities - are regularly targeted by the Big Four.
One way in which the incidence of low-balling could decrease would be if clients made it clear that being the auditor gave a professional firm no advantage when it came to bidding and winning other work. The downside of that step is, why should FDs bother? It's convenient to work with professionals who know your business.
Jeremy Newman chose to release his tale about low-balling at a time when the Financial Reporting Council is consulting on audit concentration.
Part of the recommendations of the Market Participants Group should have an impact on the possibility of low-balling. For instance, the recommendation that audit firms disclose the financial results of their work on statutory audits and directly related services on a comparable basis should ensure relevant information emerges over time about audit firms' current pricing policies.
The question at the heart of the debate on increasing choice in the audit market is how hard the Big Four firms are prepared to fight to hold on to their market share. All the evidence suggests the answer to that question is easy: very hard indeed.
This is an edited version of an article that first appeared in Financial Director magazine
