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Auditors’ state of independence

Auditor independence was already high on the agenda when the Enron scandal broke two years ago, while Sarbanes-Oxley and the like have refocused the collective minds of audit committees. But whether the auditors are truly independent is one issue; another issue is whether the clients are independent of their auditors – or tied to them. Certainly the clients are weaning themselves off the package of services provided by the huge, global one-stop shops.

But if clients have great difficulty taking their business to another suitable, qualified audit firm, then the issue can become one not of auditor independence, but of auditor competence.

We’ve known for more than seven years that the Big Six/Five/Four have a stranglehold on the FTSE-100. But the surprise for us this year was to discover the extent to which the major audit firms now dominate the FTSE-250, where they have 96% of the commercial clients (ie, excluding investment trusts) – and more than 98% of the fee income.

The problem is that the Big Four are now quite clearly too big. This isn’t to suggest that the firms are abusing their oligopolistic position.

But time and again we hear that there simply isn’t enough choice for major corporate clients. With a realistic choice of just four firms, one or two can easily be conflicted out, a third regarded as not being tier-1 in a specialist industry sector (oils or insurance, for example).

There is a danger, as Robert Bruce highlights on page 20, that some complacency might start to creep in. Auditors who virtually can’t be fired may lack the razor-sharp incentive to be as diligent as they might be, in which case another Enron-style collapse could bring with it the spectre of the Big Three.

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