The Big Four accountancy practices – PwC, KPMG, Deloitte and Ernst & Young - have come in for a tough time of late – hauled before the Public Accounts Committee to answer questions about tax avoidance schemes and then criticised by the Competition Commission (CC) about their dominance of the auditing market.
The CC was looking at concerns about the low levels of switching by companies between accountancy practices and what the Office of Fair Trading described as, “substantial barriers to entry “ for accountancy firms below the Big Four.
The CC investigation
The CC found that the overwhelming majority of audits for FTSE 350 companies are carried out by the Big Four and that 67 per cent of FTSE 100 companies and 52 per cent of FTSE 250 companies had had the same auditor for more than 10 years.
The back drop to the CC investigation follows draft EU legislation in March 2012 in response to the criticism faced by auditors generally for their failures to identify the holes in many of the financial institutions that collapsed in 2007/2008. The view from the EU was that auditors lacked independence and turned a blind eye to questionable accounting for the sake of more lucrative consulting fees. The draft EU legislation proposed the separation of audit and non-audit arms.
The CC’s preliminary findings
The CC’s preliminary findings were that, while there was no evidence of tacit collusion, there were barriers to switching auditors including cost, difficulties comparing alternative auditors and mid-tier firms facing reputational barriers to selection.
The CC has recommended mandatory rotation of audit firms every so many years, forcing companies to put audit contracts out to tender after a certain period and a prohibition on “Big Four only” clauses in loan documentation.
The Big Four’s response has been that the audit market is competitive, healthy and robust. Inevitably, the response from mid-tier firms has been that some changes are needed to the market to increase competition.
The effect of the proposed changes
Well, if the Big Four are to be believed, these changes could lead to an increase in the number of professional negligence claims against auditors. The Big Four have concerns that mid/lower tier firms would simply not have the expertise to carry out the audits of such big companies. Could they be right? Will this lead to an increase in claims against auditors who find themselves out of their depth? The CC’s final report is due to be published on 20 October 2013, so watch this space for further developments. However, given the preliminary findings, auditors regardless of their size are in for interesting times.