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October 14, 2007

Mid-tier reacts as EC report focuses on ownership rules

By Nicholas Moody

Mid-tier reacts as EC report focuses on ownership rules

An independent study has found that relaxing ownership rules in European audit firms could create new investment and entry opportunities into the international audit market, but a mid-tier firm says removing invisible barriers would do more to increase choice.

The 240-page report from consultancy Oxera, published by the European Commission, examined ownership rules that apply to audit firms, their corporate structures, their access to capital and their consequences on audit market concentration. Information was drawn from 56 surveys of companies, ranging from finance to food, and 44 interviews, including 29 of audit firms.

Grant Thornton’s head of external professional affairs, Steve Maslin, was left underwhelmed by the report’s narrow terms of reference. “It was almost as if the commission had decided that the best way to increase auditor choice was to liberalise the ownership rules, but there’s no point dealing with the ownership laws until all the perception issues and invisible barriers to entry are dealt with first,” he says.

Maslin points out that Grant Thornton does not see the lack of access to capital holding it back from increasing its audit market presence. “If the commission was successful in overcoming some of these invisible barriers of entry to the audit market – then in that scenario, we can see that it possibly would be a worthwhile exercise to liberalise the ownership laws at that point,” he says.

Some of those invisible barriers, Maslin continues, include removing the historical ties between intermediaries, such as investment banks and the Big Four accounting firms, giving shareholders more involvement in the choice of auditors, and improving the transparency of audit reports.

The provision of independent information on audit quality and independence, co-ordination of audit and regulatory requirements across member states, and reform of the liability regimes in audit firms are areas that need to be examined in detail by the EC, Maslin says.

The potential of an alternative ownership structure within audit firms has been highlighted by the experience of McGladrey & Pullen. This US member firm of RSM International runs an audit practice that is separate to RSM McGladrey’s corporate tax and consulting business, which is a subsidiary of H&R Block. The parallel audit practice is 100 percent owned by its partners and has an administrative services agreement to share resources with the larger, publicly listed H&R Block. Prior to creating its alternative practice structure with RSM McGladrey in 1999, McGladrey & Pullen’s revenue was $300 million. The current combined annual revenue for McGladrey & Pullen and RSM McGladrey has since grown to approximately $1.4 billion.

Dave Scudder, managing partner at McGladrey & Pullen, says access to capital has helped the firm grow its middle-market companies business since 2002: “I’m not sure we would have been able to capture the market share from the changes in the US audit market were it not for that additional capital and resources [available through the alternative structure with RSM McGladrey].”

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