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

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

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

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.

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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