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Corporate Governance: Tiers before bedtime

You often wonder whether anyone in government has a profound understanding of
how business works. Take the lengthy saga of hand-wringing over the fact that
there is not really enough choice among audit firms capable of dealing with the
largest companies in the land.

Forget for a moment that the reason there is now only a “Big Four” against
the one-time “Big Eight” can be laid in part at the door of governments and
regulators. Consider, instead, the spectacle of the Department of Trade and
Industry and the Office of Fair Trading heaving themselves onto a treadmill of
successive projects to work out how to increase the choice. The fact that, as
anyone in the business could tell them, there is no way to undo the past seems
to be neither here nor there. Onwards they drive, applying the ineluctable logic
of civil servants, without seeming to notice that business and the markets
simply do not work like that.

Certainly there are all sorts of reasons why it would be good to have a “Big
Eight” again, or even a “Big Six”. Financial directors would have much greater
choice. The market would breathe more easily when people became litigious. There
would be a greater choice for graduates seeking a career path. There would be
more space for people within the large firms to move around and follow their
chosen career paths. There would be much less work conflicted out.

But there is no “magic bullet” that the government has somehow overlooked
which would bring about such a change. Even if you forcibly merged the UK
mid-tier firms in positions five, six and seven together you would still not end
up with a firm as big as the current fourth. And all the evidence is that those
firms in any case do not want to be part of the largest reaches of the

If you talk to Dermot Mathias, senior partner of one of the obvious
contenders, BDO Stoy Hayward, he will tell you straight: “We have no desire to
turn the ‘Big Four’ into a ‘Big Five’ and become a poor relation.” The same is
true for the other obvious contender, Grant Thornton. Its US managing partner
said the other day that the firm was “not pursuing Fortune 500 clients”.

The problem for all those people at the DTI who would love to find a way to
rig the market is that both BDO and Grant Thornton like it fine the way it is
and find it very profitable being where they are.

In part, this state of affairs has been brought about by the government and
the regulators. The Big Four are now restricted, as a result of post-Enron
regulation, in the amount of non-audit work they can do for their audit clients.
So that work goes elsewhere. And the mid-tier firms are only too happy and
perfectly competent to pick it up. The audit of the biggest companies requires
huge staff numbers; non-audit work does not.

“We go head-to-head in non-audit services – for example, tax and corporate
finance,” says Grant Thornton’s worldwide CEO, David McDonnell. “We have always
provided a lot of that and the big push in the UK is for non-audit work.”

The same is true for BDO. “We want to be dominant in the mid-tier,” says
Mathias. “We believe we can compete very effectively with the Big Four on the
FTSE-250 and below as a primary supplier and in the FTSE-100 as a secondary

Financial directors will not take a punt. The pressure from investors will be
for a Big Four name on the audit opinion. They also get a different service from
the Big Four: there is greater international consistency in their networks, they
can produce people who are part of the accounting standards-setting community,
and so on.

The government could, of course, help if it passed more of its work to the
mid-tier firms rather than the Big Four. But it doesn’t. And, in any case, most
of its work is consultancy-based, which the mid-tier tend not to do.

Then there is the idea of forcibly breaking up some of the Big Four. You
could have an Ernst and a separate Young, for example. But a UK fiat to achieve
that sort of break-up couldn’t work on the international stage.

The DTI and the OFT may wish that they could turn the clock back but there is
no mechanism that is going to achieve that. They cannot unwind poor decisions in
the past. Besides, it has all been driven by global issues for years. To
re-organise the world’s audit firms would require enormous cooperation between
governmental and regulatory bodies around the world. And to achieve that would
make the task of organising global partners in a Big Four firm look like child’s

Robert Bruce is a leading commentator on accountancy issues

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