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Competition Commission slams Big Four

Watchdog finds benefits in “switching auditors more often”

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The UK Competition Commission has said the audit market is restrictive in terms of participants and dominated by the Big Four accounting firms, thereby making it harder for companies to switch accountants.

Publishing the preliminary findings of a probe which started in November 2011, the competition watchdog noted on Friday that the Big Four – namely KPMG, PwC, Ernst & Young and Deloitte – monitor the books of nearly all major companies in UK (and around the world) and in some cases have served the same clients for decades.

To this effect, it found that 31 percent of FTSE 100 companies and a fifth of the next 250 firms have had the same auditor for over 20 years. The commission also noted "significant dissatisfaction" among investors but added that changing the "long standing and entrenched" system will take time.

It has proposed a number of reforms. One of the proposals included compelling companies to contract out their audit work to tender every 5 to 7 years, and accounting firms every 7 to 14 years.

Laura Carstensen, chair of the Competition Commission probe, said, "We have found that there can be benefits to companies and their shareholders from switching auditors but too often senior management at large companies are inclined to stick with what they know."

The US and EU are discussing similar proposals. However, going much further, the Competition Commission has also proposed banning "Big Four only" clauses, implying that partnering banks could not insist on a borrower using one of the top four audit firms.

In response, the Association of Chartered Certified Accountants (ACCA) welcomed the competition watchdog's statement but did not agree with a mandatory imposition of rotation of auditors.

Sue Almond, technical director at ACCA, said, "The issue has always been about the end user of audit services, and we have previously said that future recommendations need to be workable for business while enhancing investor confidence."

"Audit is only one part of this jigsaw and it is not the only way to tackle investor concerns. Progress could be made without creating more rules by enhancing corporate reporting through integrated reporting. This development aims to reflect the interconnected nature of economic and financial performance with environmental, social and governance factors in organisations’ annual reporting," she added.

However, the ACCA said the commission's findings should be read with considerable interest not only in the UK but across Europe and that it was a much-needed debate to have.

The second rung of audit firms, including Mazars, BDO and Grant Thornton, also welcomed the findings. A spokesperson for BDO said the recommendations if implemented would lead to a "healthier market".

Grant Thornton said the findings confirm that needs of shareholders and investors are not currently being best served and that there are other firms, such as itself, who are already well placed to compete in the market.  

"We support the creation of a diverse market for the supply of audit and non-audit services to the FTSE 350 with increased competition bringing benefits through improved pricing, service, innovation and overall audit product," said a spokesperson.

However, representatives of the Big Four insisted that there is strong competition in the UK accompanied by downward pressure on audit fees in a highly competitive macroeconomic climate. Ernst & Young said it strongly disagreed that "the audit market is not serving shareholders."

"We note that much of the summary is on aspects of corporate governance and regulation, and in that context we are surprised that there are important omissions from the description of how that framework operates," a spokesperson said.

"For example, there is no mention of the role of the Chair of boards and the senior independent directors in representing and safeguarding shareholder interests, nor of the importance of unitary boards themselves. We think the somewhat stark description in black and white terms of the role and power of the finance directors and their motives does not represent the real world as we experience it."


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