Grant Thornton last week announced that it has decided to opt out of bidding for audit work for FTSE 350 companies, in a move that could ultimately cause a seismic shift in the audit market. Although it is Britain’s fifth biggest accountancy firm, it has taken the decision to focus its efforts in other areas, having become tired of coming a “glorious second place” in the bidding to the ‘Big Four’, as described by Sacha Romanovitch, CEO of Grant Thornton, in the FT. She explained that each tender exercise costs the firm around £300,000, and that is aside from the costs that failure to secure the work has in terms of staff morale. The dominance of the Big Four (Deloitte, PWC, EY and KPMG) has been the subject of much debate in recent years; Grant Thornton’s decision has once again brought this issue to the fore.
It has been reported that the Big Four audited all but nine of the UK’s 350 largest listed companies at the end of their latest financial years. It has proved almost impossible for firms other than those in that group to break into the market, given the close relationships the Big Four have with those companies, and the economies of scale from which they benefit.
What then will be done by regulators to break down what has been termed the “international oligopoly”? Some steps have already been put in place. Under Competition and Markets Authority (CMA) rules, effected in 2016, FTSE 350 companies must put their audit work out to tender every ten years. They also must change their auditor every 20 years. These moves were designed to create more competition in the market. However, the effect has been an increase of competition between the Big Four, as opposed to externally to it.
Stephen Haddrill, the Chief Executive of the Financial Reporting Council (FRC), which regulates the audit market in the UK, has recently highlighted this issue by discussing a potential investigation by the CMA. He has suggested that the CMA should investigate the case for ‘audit only’ firms in an attempt to increase competition and reduce conflicts of interest in the accounting profession. This would cause a significant change in the way that the Big Four are run; they would each need to ring-fence their UK audit arms into separate businesses.
Although the eventual proposed solution to this issue is not clear, what is notable is that by Grant Thornton voting with its feet, this issue has been brought to a head. We will have to wait and see whether any regulatory action is taken to address the perceived dominance of the Big Four. If so, it would cause a significant shakeup in the accountancy world.