PERSPECTIVE: Critics of the big four audit status quo point out that in other sectors, such as software, it is not unusual for a regulator to take action in order to break up a monopolistic market share.
THE pressure of market forces alone will be enough to break the Big Four’s stranglehold on leading plc audits.
That is the contentious view of Norman Murray, the chairman of Cairn Energy and president of the Institute of Chartered Accountants of Scotland. He was speaking last week after attending the Financial Reporting Council’s second stakeholder meeting on competition and choice in the UK audit market.
“We should trust market forces to mould demand for audit services and already, since the Oxera report was published, we can see significant moves being made.”
The government-commissioned Oxera report, published in April, highlighted the fact that the Big Four audit 97 per cent of FTSE-350 companies and that many large plcs can only choose between two or three such firms. The report said the “barriers to entry” into the market for auditing FTSE-350 firms were so high that “in current conditions, substantial new entry either by a mid-tier or a new firm is unlikely”.
Murray nevertheless insists that — six months on — the multinational quartet is already losing its grip. He said that other firms from outside the ‘Big Four’ (Deloitte, Ernst & Young, KPMG, and PwC ) are being given a greater chance to compete for audit and non-audit work for FTSE-350 companies.
Murray, who also sits on the boards of Robert Wiseman Dairies and Greene King, added: “I believe that the degree of auditor choice available to listed companies is wider than is often perceived, and that there is currently no issue of sufficient concern to warrant artificial intervention in the market.
“As a non-executive director of three listed companies and an audit committee chairman, and also through anecdotal evidence from ICAS members, we can see that some of the largest institutional investors — including Morley, Hermes and F&C — are encouraging company boards to access the skills and capabilities of Group A [mid tier] accountancy firms. Investors increasingly believe that audits by such firms can offer a cost-effective and valid option.”
So where is the evidence? Murray stresses that said Group A practices — including Grant Thornton, Baker Tilly, BDO Stoy Hayward, RSM Robson Rhodes, PKF and Mazars — have recently enjoyed some success in winning non-audit work from mid-sized and larger plcs. He views this as a stepping stone to impressing clients with their audit skills.
“I’m wholly opposed to regulatory intervention, and believe instead that the market will sort itself out. What we have to do is to encourage that.”
Prem Sikka, professor of accounting at the University of Essex and a longtime critic of the Big Four, was at the same event as Murray and, unsurprisingly, he begs to differ. Professor Sikka wants to see each Big Four firm limited to auditing 10 per cent of the FTSE-500, and an obligation on listed companies to change their audit firm every five years.
“Murray’s views take no account of the barriers to entry, which are high, “ Sikka told The Herald. “Auditing is not a natural market — it is a market that was created by the state — and, as such, the state has a duty to ensure that it functions properly.”
“If there’s to be such faith in markets, then why are the authorities so frightened of allowing one of the big firms to go to the wall? Why do they merit special protection through proportionate liability and other such shields? I fear the whole FRC project will lead us nowhere.
“At last week’s meeting Paul Boyle [chief executive of the FRC] said: ‘I don’t want to see the Big Four becoming three’. But if one of those firms delivers shoddy material, then they deserve to be sued and to be put out of business. What is so special about the Big Four?
“The truth is that regulators, including the FRC and the DTI, are running scared of these big accountancy firms. In other market sectors, such as software, it is not unusual for the regulator to intervene to break up a monopolistic market share. Look at what’s happened to Microsoft.”
The Association of British Insurers (ABI) is more positive about the FRC’s programme. It believes that behavioural change, albeit not entirely market-driven, will help ease the dominance of the Big Four.
In its submission to the FRC, the ABI said: “Investors need to make clear that they do not automatically expect companies to select an auditor from among the Big Four . . . companies should keep their choice of auditor under regular review and periodically tender for new auditors.”
Peter Montagnon, the ABI’s director of investment affairs, believes that through some “gentle prodding”, akin to what happened after various corporate governance reviews, it is going to be possible to forge a consensus among FTSE-350 firms that they should change their auditors more frequently. If that became the norm, Montagnon said “it would no longer be seen as suspicious” when a company sacks its auditors.
Currently, the immediate assumption is that something rotten may be lurking beneath the numbers. Rates of auditor churn in the UK are currently no higher than 3 per cent-4 per cent per year.
Nor do so-called Group A firms themselves necessarily favour regulatory intervention or an enforced break-up of the Big Four. Instead, they would prefer to be given a greater chance to quietly build up their client base among smaller plcs before moving towards handling audits for progressively larger companies.
It is a sign of the times that Grant Thornton is presently running a national press advertising campaign under the strapline “Think beyond convention, think beyond the Big 4.”
Murray said: “What the (Group A) firms should now be doing is to market themselves more aggressively. They must ensure they are on the radar screen of every chairman of a FTSE-350 company.”
This article was published in the Herald on 25 September 2006