May I make a polite suggestion to politicians and regulators? It is simply this: stop the hand-wringing over the quoted company audit market. There is nothing that can be done about the Big Four. All any of us can do is behave as interested spectators waiting to see if a titanic commercial disaster befalls them.
Give little credence to the suggestion of former City minister Lord Myners that the Office of Fair Trading needs to investigate the dominance of the Big Four accounting firms and break them up in order to improve competition. The idea that regulators can rig – sorry, rearrange – the audit market to prevent that unpleasant day is just fantasy. The first and most formidable obstacle is that it is impossible to see governments and regulators having the collective will across the globe to make it happen. Look at the problems politi-cians had after the financial crisis and near collapse of the banking system in turning fine words into effective and decisive action – which hasn’t quite happened yet.
The unpalatable truth for politicians and regulators is that they should never have approved the merger of Price Waterhouse and Coopers & Lybrand back in the late 1990s. While they also made it clear that they would not allow Ernst & Young and KPMG to merge, it was simply too late. The collapse of Arthur Andersen, embroiled in the Enron scandal four years later just proved what a bad idea it was to shrink the Big Eight to the Big Five, and then to the Big Four. Yes, we can all be wise in hindsight, but that does not make it any easier to go back.
In its investigation into auditors, their role and market concentration, the House of Lords Economic Affairs Committee has asked many important and influential people, including Lord Myners, several interesting questions. The promised report on the findings will doubtless make fascinating reading when it is published in the spring, but the government is unlikely to be able to respond decisively.
No one is surprised that most of the commercial world, including the accounting sector, is pretty happy about that set-up. The big-firm auditors that specialise in a niche area of the quoted sector are a valued and valuable commodity. Medium-sized firms must be pleased on the whole to leave the big beasts to their quoted company clients. While no doubt the odd envious glance is directed towards Big Four pay packets and the rich pickings that are partners’ drawings, most working in the middle tier must comfort themselves with the question of whether they would want the hassle and the risk. There is plenty of other work to be had. And while some in the middle tier have talked about investing tens of millions in going after the audit of large quoted companies, the enthusiasm is not overwhelming.
Outside the audit profession, the players in the quoted company market – finance direc-tors, bankers and non-executive directors – have no incentive for risking to look for audit services from non-Big Four firms. This narrow focus is institutionalised with some banking covenants allegedly restricting the choice of auditor to one of the Big Four.
The phrase that trips off many people’s tongues about the dominance of the Big Four is “systemic risk”. But rather than try to turn back to the halcyon days of eight audit firms, it would be far more useful to do a bit of scenario planning in the event of some critical audit failure. While no one could stop another Enron, it is interesting to speculate how governments would react. Let us not confuse auditors with bankers: there is no moral hazard here. The regulatory action if a major firm teetered would be to usher it into the arms of another firm. It could be a reverse takeover of a mid-tier firm rescuing a bigger brother. Not pretty, but nicer than falling into the arms of a big rival. The best we can hope for on audit concentration is thus far and no further.
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