The issue of auditor choice has become an intractable one. There is no reason
why having only four big audit firms worldwide is a problem. In the UK, there is
similar dominance in the supermarket business, or the high street banks. People
growl about it, but no one has gone to the barricades and consumers have not
deserted the large supermarkets in droves for their local shops in protest.
Yet, there we were at the latest open ‘stakeholder’ meeting run by the
Financial Reporting Council on the topic of choice in the UK audit market. The
aim of the meeting, after the FRC had received much feedback on its previous
meeting and reports, was straightforward: “We are seeking to reach
broadly-supported conclusions from this stage of the debate and agree on the
next steps”, said the FRC ahead of time.
The difficulty is that the problem is far from clear, as is most peoples’
thinking on the matter. After the first meeting, two organisations made it clear
in their responses that they saw no problem and felt that no action should be
taken. These were the largest firm in the country, PricewaterhouseCoopers, and
the oldest accounting body in the world, the Institute of Chartered Accountants
of Scotland. And you might have assumed that if they really thought that there
was no problem then they wouldn’t, having nothing further to say on the issue,
have bothered to turn up to the meeting.
Instead, we had the UK chairman of PwC and the head of professional and
regulatory policy, along with the ICAS president, all sitting patiently waiting
for their turn to have a go with the microphone. And very eloquent they were.
But it summed up the confusions inherent in the debate.
It was, in some ways, understandable. The regulators take a logical view on
the issue of having only four large audit firms. They insist that there must be
a way of increasing choice and widening the marketplace. Yet it was the
regulators which reduced the marketplace from six to four by allowing one huge
merger through and then, in the US, hounding another large firm into extinction.
This is not a debate which, historically, has had any logic attached to it.
Underlying the arguments is another agenda. It is not a hidden agenda, it is
simply submerged because no one can properly substantiate it. It is that,
frankly, the big audit firms are becoming less and less useful and, possibly,
less good at what they are supposed to do. The period of implementation of
international financial reporting standards, for example, left finance directors
pulling their hair out in frustration at the plodding way in which advice, which
they needed quickly, was doled out from audit firms to which they are paying
millions in fees every year. The Big Four firms are not doing themselves any
You can argue that the market should be allowed to sort itself out, but it is
hard to see how that would work. Even if the fifth and sixth largest UK firms
merged they wouldn’t challenge the existing fourth largest firm. And there are
no signs of appetite for the huge amount of spending on the resources a firm
would need if it were to become a credible part of a Big Five. And the FRC’s
argument that easing the rules on outside capital might allow the creation from
scratch of a credible alternative firm, or firms, is fraught with problems, not
least of independence.
Regulators themselves will always have difficulties if they want to really
push for greater competition. To create a credible competitor for the Big Four
is a global task. It is not something which could work on a purely UK basis. At
the moment, there is no sign of global companies dropping the Big Four and
hiring medium-sized firms instead.
But the biggest obstacle to the expansion of the Big Four back to the old
days of the Big Six, or the Big Eight of the 1970s and 1980s, is simply that the
desire is not strong enough. Regulators can argue that it is desirable and
academics can produce studies, but, in the end, it is down to the owners of bu
sinesses and the drivers of businesses, the investors and the finance directors.
There were some investor organisations at the FRC meeting and they were
eloquent enough. But there was not a critical mass of furious demands for
change. At the outset of the meeting, when the audience was asked to show which
constituents they represented, it became obvious that there was hardly anyone
there from the corporate world, while there were lots of auditors in the room.
The very people the FRC was hoping to encourage had not shown up, while those
who most feared the FRC’s efforts were there en masse.
Ultimately, it is the lack of a tangible appetite for change which defeats
efforts to expand audit choice. Take the most vociferous campaigners in this
arena. Have they followed their own arguments and chosen second-tier audit
firms? Morley Fund Management, as part of the larger group Aviva, is audited by
KPMG. The Hermes Group which, running the biggest pension fund in the country,
is not slow to make its views clear, is audited by Deloitte. And the
Universities Superannuation Scheme, the second-biggest UK pension fund, is
audited by KPMG. QED, as you might say.