RSS feedsFinance directors are being held partly responsible for the current state of the UK audit market. April’s report, Competition and Choice in the UK Audit Market, published jointly by the Department of Trade & Industry and the Financial Reporting Council, stressed the influence that FDs have over the choice of auditor.
While audit committees are now increasingly having a say in the appointment, they are still taking a lot of notice of the finance director’s views on the matter. Indeed, many chairmen of audit committees are – according to the research, conducted by economic consultancy Oxera – little more than finance directors in disguise. Chairmanship of audit committees is dominated by ex-finance directors, more than half of whom have worked for one of the large audit firms.
No one who knows anything about the state of the UK audit market would have been in danger of having any reaction nearing surprise on reading the 167-page report.
The big guns
For FTSE-100 companies there is no option but to go for one of the Big Four. The
report labelled this attitude as the IBM effect (you know, you never got
sacked…). In other words, finance directors of big companies want a Big Four
firm as insurance against catastrophe and to minimise the reputational risk.
Despite this desire for a big name to put at the bottom of the statutory audit report, what finance directors and audit committees really appreciated was the informal advice and help that the audit partner handed out to the executives and non-executives alike.
This advice concentrated on new developments in auditing standards: best practice in the industry on dealing with certain standards and how the company could improve its internal processes and controls.
So, however much others may wring their hands and worry about the domination of the Big Four, UK plc doesn’t really care. Well, not quite. The report revealed that this Big Four stranglehold on the market is having a real impact on the room for manoeuvre among top finance directors, who probably aren’t that used to being thwarted.
The report uncovered evidence that “occasionally” Big Four firms decline to bid for the audit on the grounds that the non-audit fees the finance director is handing over are more valuable than the prospect of the audit fee. If the Big Four take a commercial decision not to go for the audit, then it is possible that a major company would have no one to turn to but the incumbent auditor.
Like all of these reports, stakeholders could find whatever they wanted in it to justify their position. So one source at the ICAEW said no one was particularly worried at the findings because there was no evidence uncovered of anti-competitive behavior. True, although it wasn’t Oxera’s remit to root out such behaviour. On the public record, the ICAEW stuck to its mantra of audit quality, while at the same time maintaining a painful balancing act fearful of upsetting entrenched views across the firm-size divide.
Competitive market
With or without the support of the ICAEW, the Big Four are hardly quaking in
their boots. Peter Wyman, head of professional affairs at
PricewaterhouseCoopers, said: “I’m not convinced that there is a substantial
problem. My initial impression is that we are operating in a fiercely
competitive market.”
Leave aside the temptation to dismiss the comment as a Mandy Rice-Davies moment. Maybe the audit market is tough if you are in it. The introduction of international financial reporting standards, the emphasis on compliance led by Sarbanes-Oxley and the drive for quality, plus the lack of alternatives have all helped firms increase their fees. Oxera says fees have gone up roughly in line with their clients’ turnover, but whether this increase has helped to boost the Big Four’s profit margins only the firms know. And they are not telling.
One possible move to help mid-tier firms make more of an impact is, according to the Institute of Chartered Accountants of Scotland and the mid-tier firms themselves, to press ahead with proportionate liability, as envisaged in the Company Law Reform Bill. As the Scottish ICA said, it is “essential in an attempt to ensure that, at the very least, the current level of competition is maintained”.
Pick up the pieces
BDO Stoy Hayward and Grant Thornton, the two firms most likely to pick up crumbs
from the Big Four table, noted the “systemic risk to the capital markets of the
current set up” and what they termed “institutional prejudice” against the small
number of other audit firms that can compete in the public company audit market.
The two firms said that the report highlights dissatisfaction of many
stakeholders with the status quo and they hoped the report would foster debate
and lead to change.
The primary conclusion from the report is competition is not working as well as it would with a greater number of competitors in the markets for auditing FTSE-100 and FTSE-250 companies. But it is hard to see a strong desire for increased competition among the government, the accountancy profession, the Financial Reporting Council or even top FDs.
