solutions to audit choice
The UK Financial Reporting Council’s (FRC) Market Participants
Group (MPG) report on audit choice is not likely to have
far-reaching consequences on the UK auditing market. That is the
consensus of industry leaders speaking to TA following the
release of the report earlier this month. A mid-tier managing
partner fears the UK might have lost the initiative to introduce
more choice into its audit market, while another mid-tier firm and
a Big Four firm remain unconcerned.
BDO Stoy Hayward’s managing partner, Jeremy Newman, made the
comments in response to the recent release of the FRC final report
on audit choice from its MPG. The report made 15 recommendations
but declared it had found no silver bullets that could rapidly
increase choice in the audit market.
Newman is disappointed by the “modest nature” of the proposed
changes and is wary of a heavy US-style regulation solution to the
audit choice question. “The fear I have is that this is not just a
UK problem but a global problem and the US has set up a working
party to look into it. And the initiative, which has been in the UK
for the past couple of years, is in danger of shifting to the US,”
Newman said. “It worries me that a reaction to the competition and
choice piece from the [US] will actually impact on us in the UK and
we will end up having to take on an American solution that wouldn’t
necessarily fit.”
Fellow mid-tier firm Grant Thornton UK takes a longer-term view of
the UK audit market and did not expect overnight changes from the
MPG report. Steve Maslin, head of external professional affairs,
said a meaningful change to the audit market is going to take five
to ten years. “I don’t think it’s practicable to bring about a much
quicker change, unless you are going to take action such as
breaking up one or more of the Big Four, or forcing them to give up
some clients to other firms, and neither of those outcomes is good
for the audit market and the capital market,” he said.
Maslin pointed out that although change may be a long way off, the
FRC’s focus on audit concentration has coincided with a 20 to 25
percent increase in Grant Thornton’s larger corporate audit
business. “One of the fastest-growing areas of our business in the
last year has been the public interest audit functions and to a
degree I think that’s come about because the FRC has raised the
issue of concern about too much concentration on the Big Four,” he
said.
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By GlobalDataGerald Russell, a senior partner at Ernst & Young UK, said the
report is balanced but he agrees it is unlikely to dramatically
introduce choice in the UK audit market. “There will be an impact
over time but it’s not going to be seismic and it is not going to
suddenly change the size of the audit market in the FTSE 250 global
companies,” he said.
Newman said the fact that something is happening is good, but he
rallies against what he perceives as institutional prejudice
against non-Big Four firms. He said this is evident in
recommendation nine, relating to the disclosure about appointing
certain types of auditing firms. “We are concerned that a number of
banking agreements included a clause that said you had to pick a
Big Four firm as your auditor. Those clauses reinforce a prejudice
that the Big Four are ‘better’,” he said.
Russell and Newman both agree they prefer market-led solutions, but
Newman wants to see a more concerted effort to shunt the process
along. “I think it needs a little shove from a regulator that
leaves you with a market solution,” he said.
UK Market Participants Group final report
Key recommendations
1. The FRC should promote wider understanding of the possible
effects on audit choice of changes to audit firm ownership rules,
subject to there being sufficient safeguards to protect auditor
independence and audit quality.
2. Audit firms should disclose the financial results of their work
on statutory audits and directly related services on a comparable
basis.
5. The FRC should continue its efforts to promote understanding of
audit quality, and the firms and the FRC should promote greater
transparency of the capabilities of individual firms.
9. When explaining auditor selection decisions, boards should
disclose any contractual obligations to appoint certain types of
audit firms.
