House of Lords hearings could impact on Big Four dominance

Finance directors have so far felt themselves largely untroubled by the debate raging around audit firms. But with a series of hearings in the House of Lords over audit market concentration, and in particular whether or not the Big Four firms - PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young - have been too dominant in the market at the expense of smaller and mid-tier firms, some are starting to take an interest, as talks move to fee structures and service levels.

FDs are starting to realise that the eventual outcome of the hearings may have an impact on businesses and their relationships with their auditors. BDO managing partner Simon Michaels argued at one hearing that “institutional prejudice” on the part of audit committees, banks, investors and FDs is what prevents mid-tier firms from being appointed as auditor to many large companies.

But with mid-tier firms being investigated over the quality of their audits - an example being the recent Accountancy and Actuarial Discipline Board investigation into Baker Tilly over its audit of Tanfield Group - do Michaels’ protests ring hollow?

The snob factor

To some extent, Michaels is right, says Neil Tyagi, FD of EagleBurgmann Industries UK, who has discussed audit service issues on Financial Director’s LinkedIn group. “There’s quite a bit of snobbery about the Big Four,” Tyagi admits. “A lot of FDs are guilty of perpetuating it. When looking at competitors’ accounts, many FDs will look at whether their auditors are a Big Four.”

However, Narin Ganesh, regional FD of Crown Worldwide, had not heard Michaels’ argument before. “It could stem from the number of FTSE finance directors, or their predecessors, who are ex-Big Four,” he surmises. “There is an assumption about the relative capabilities of Big Four and mid-tier firms. I would say my recent experience with one of the Big Four has been positive, largely down to the attitude of the audit partner - who I regard as pragmatic and commercial. But I can think of another example in a former FD role I held, where the audit experience with another Big Four firm was bordering on a fiasco.”

So why use a Big Four firm over a mid-tier? For large, global businesses such as EagleBurgmann, Tyagi says only the larger audit firms have the knowledge and experience to deal with some of the issues their businesses have. But it may be less about practical issues than a form of peer pressure to do so that informs the choice, he says. “Some businesses might feel that others will look at them more favourably if their auditors are a Big Four firm - the perception is they will appear as bigger companies,” he explains.

The other problem for UK mid-tier audit firms is that FDs of international businesses may not have so much say in which firm they choose as auditor: often this is dictated by an overseas parent company. Ganesh admits that if he were able to choose, he “would be quite keen to look at mid-tier firms” on the basis of value for money: “I don’t think they would do any worse or better a job than the Big Four.”