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Pride and prejudice

Yesterday, in the latest installment of the House of Lords hearing, representatives from four mid-tier accountancy firms (Mazars, BDO, Grant Thornton and RSM Tenon) made their case over domination of the audit market by the Big Four firms (PwC, Deloitte, KPMG and Ernst & Young).

One of the issues was the idea of “institutional prejudice”. This “prejudice” sees hiring non-Big Four auditors as “a risky bet” despite providing a service of just as high in quality and depth of experience and knowledge, according to BDO managing partner Simon Michaels, and is a view shared by companies’ audit committees, investors, banks – and finance directors.

In other words, Big Four firms, the argument goes, are often appointed on the perception of good, in-depth, quality services which are already available at mid-tier firms. But if some mid-tier firms are looking to grab a slice of the Big Four’s audit pie by wooing FTSE companies, will this mean they will end up moving away from their “smaller” clients, many of which will be SMEs who need a trusted business partner in these troubled times? And what will this mean for the FDs of those companies?

Regardless of whether their company has appointed a Big Four auditor, a mid-tier auditor or smaller, finance directors – like the House of Lords committee – have begun to question the value of the company audit. There have been some murmurings among a handful of FDs as to whether the audit offers them the value they expected in the first place.

From the tone of the Lords hearing, however, many changes to audit are being contemplated – changes that could well affect how FDs work with their auditors over the coming years. Mazars’ David Herbinet proposed the idea of appointing joint auditors, something that is mandatory in his native France. Joint auditors work together to reach an opinion on the financial statements, and (thankfully for FDs) two audits would not need to be carried out. The potential upside is that an FD could get the benefit of a “second opinion” on the state of the business – or make it easier to change auditors by providing that continuity. The overwhelming concern for FDs would, of course, be the potential cost of appointing two auditors to do one company audit.

But right now, of course, this is just a proposal. Other questions proposed by the Lords centred on whether internal audit should be made mandatory, or audits being made to put out to tender every so often – especially given that some companies hold onto the same auditors for decades. With the firms themselves suggesting more intervention in the market needed from regulators and investors, it may be time for FDs to review their audit situations resulting from the House of Lords inquiry. In any case, the debate around audit continues, and while FDs have been largely untouched and detached from it so far, the time may come where they may have to think very seriously about their auditor options.

I am writing a piece for Financial Director‘s December issue on this so I’ll be on the hunt for the FD’s views.

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