The Financial Reporting Council has unveiled the membership of an industry panel that will examine ways in which “market participants” might rein in the stranglehold the “Big Four” accountancy firms have over UK auditing.
The Market Participants Group forms part of the FRC’s ongoing investigation into the oligopoly for auditing UK plcs enjoyed by Deloitte, KPMG, Ernst & Young and PricewaterhouseCoopers.
ICAS members on the panel are Professor Ian Percy, deputy chairman of Weir Group, David Robertson, finance director of Mears and Derek Scott, chairman of the Stagecoach pension scheme trustees. Other members include PwC partner Peter Wyman, Deloitte’s John Connolly, Huw Jones of M&G, Michael Power of JP Morgan Cazenove and Robert Talbut of London Asset Management.
The group will also look at ways of averting financial meltdown in the event of one of the Big Four global firms collapsing, as Big Five player Arthur Andersen did in 2002. The group’s members were appointed as individuals, based on their knowledge of the audit process.
The panel’s main role will be to advise the FRC on which market-led steps to mitigate risks could be the most effective and how these might be implemented. The group is scheduled to publish its first progress report in the first quarter of 2007 and the usefulness of a further stakeholder meeting at that stage would be considered.
Most panel members were guarded about their views in advance of the group’s first meeting. However Professor Percy said: “We’ll be looking at the dominance of the Big Four and the anxiety people have about what might happen if one of the big four were to disappear. The fact is international companies, with operations across the world, are looking for an auditor who can provide them with services in all the countries in which they operate. Currently only the Big Four are capable of providing that skills base.”
And Michael Cleary, national managing partner of Grant Thornton, also a panel member, said he is not convinced lack of international reach needs to as big a barrier for mid-tier firms such as his own. Cleary believes there are perhaps only 150 companies in the FTSE-all-share that really need the depth and breadth of international service that the Big 4 can provide. He also suggested that the introduction of proportionate liability reform might help level the playing field for smaller accountancy firms.
Cleary said: “There might be as few as 150 UK companies whose audits require either such a scale of resources or such highly specialised resources that they are best served by a Big 4 firm. The remainder of the quoted company sector is well within the capability of firms other than the Big 4. If the market were more competitive, then that should also drive audit quality since quality is what companies are buying at the end of the day.”
Regarding corporates’ prejudice against smaller accounting firms — partly a consequence of most of the biggest corporate collapses of the 1980s and 1990s having less well-known accountancy firms such as BDO Stoy Hayward as their auditors — Cleary added: “We urge more large investors to contribute to the debate and make their views publicly known on a sustained basis.”
“Audit firms can do their bit. They should communicate their capabilities more effectively to the market and be specific about which market segments they choose to operate in.
“By taking action to improve the market’s understanding and awareness of the issue of choice and by promoting greater dialogue between investors and audit firms, the FRC can play a critical role in overcoming structural deficiencies in the audit market.”
The FRC appears to believe behavioural changes — for example creating a climate where it is more acceptable for quoted companies to appoint non Big 4 firms as their auditors — will help to open up the market.
Scottish Widows chairman Gavin Gemmell believes the lack of competition in the UK audit market, where 97% of FTSE-350 companies are currently audited by the Big 4 accountancy firms, “probably is unhealthy”.
Also a non-executive director of Lloyds TSB and chairman of the Court of Heriot Watt University, Gemmell told the Herald: “Even five major accounting firms is probably too few. Should a company wish to change its auditors and there are only three others to choose from, it does not represent much choice. And choice is even more restricted if you’re in a specialist industry like life insurance and banking.”
Gemmell, a chartered accountant who retired as senior partner of Baillie Gifford in 2001, said he believes the institutional investors who are seeking to persuade plc audit committees that it is acceptable for them to appoint a non-Big 4 firms as their auditors ought to lead by example.
Over the summer a group of investors including Hermes, F&C and Morley wrote to audit committee chairmen to this effect. However Gemmell said that one company where he is a non-executive director has written to the audit committee chairmen at the fund managers concerned, asking them why they don’t lead by example and appoint a non-Big 4 firm to do their own audit. “But we have not heard back,” said Gemmell.
In tandem with the work of the Market Participants Group, the FRC is liaising with relevant regulators including John Tiner’s Financial Services Authority to consider possible regulatory actions.
This is the correct version of the article. The version published by The Herald on 16 October 2007 contained errors introduced in the editing process which required a correction to be published on 17 October 2006