As reported in Reuters, companies in Britain could be forced to switch accountants to break up the cosy relationships between the “Big Four” and their clients, blamed for masking weaknesses exposed by the financial crisis. The “Big Four” – KPMG, PwC, Ernst & Young and Deloitte – check the books of nearly all listed companies in Britain and around the world, and have often served the same clients for decades.
The UK’s Competition Commission proposed that companies put out their audit work to tender every five to seven years, and change accounting firms every seven to 14 years – roughly in line with changes being discussed at the European Union level.
Investors would also play a role in selecting an auditor, according to plans put forward by the commission, which published preliminary findings from a probe it began in 2011.
The industry was put under scrutiny after auditor “complacency” was blamed by UK lawmakers for deepening the financial crisis.
The Competition Commission found that 31 percent of the top 100 companies in the UK and a fifth of the next 250 firms had had the same auditor for over 20 years.
Competition in the UK is restricted by factors that make it hard for companies to switch accountants, the Competition Commission found, and there is a tendency for auditors to focus on satisfying management rather than shareholder needs, it said. The findings add weight to a draft European Union law which contains plans for boosting competition in the 27-country bloc’s audit market which would override UK changes.
The United States is also mulling auditor rotation as the sector faces questions for giving banks a clean bill of health just before governments had to step in and rescue them in the 2007-09 financial crisis. Critics have said the Big Four should separate out their audit and advisory units, a step the draft EU law looks at.
“The real issue we have identified is stickiness in the market,” Laura Carstensen, who chaired the probe, told Reuters. “The question of break-up was not on our list.” There was “significant dissatisfaction” among big investors, the commission said, but changing the “long standing and entrenched” system would take time.
Its proposals go further than a recent change introduced by Britain’s Financial Reporting Council (FRC), which requires companies to consider changing accountants every decade. The FRC said it was pleased the Commission was looking at taking more steps to enhance competitiveness and switching.
PIRC, which represents pension funds and fund managers, said mandatory rotation was the best way to ensure auditor independence and large shareholders increasingly favoured this.
The commission also proposes banning “Big Four only” clauses, meaning banks could not insist on a borrower using one of the four top audit firms.
The Big Four insist there is strong competition and point to downward pressure on fees and some recent switchings of auditors among big companies. PwC said the Competition Commission had “grossly underestimated” the critical role the audit committees at client firms play in protecting shareholder interests.
Ernst & Young said it was pleased the watchdog found no collusion, abuses or excess profits but rejected accusations that the audit market was not serving shareholders, as did Deloitte and KPMG.
“In addition, we believe that competition between audit firms is healthy and robust and that the evidence supports this,” E&Y said.
But second tier audit firms, such as Mazars, BDO and Grant Thornton, welcomed the findings after having argued it would not be worthwhile expanding unless there was some intervention to help prise open the market.
“It’s clearly going to make a significant contribution in Brussels as the European institutions decide the way forward,” said David Herbinet, Mazars’ UK head of public interest markets.
The watchdog did not propose curbing the Big Four’s advisory services such as tax to clients they audit and also said joint audits, whereby one of the Big Four must share a customer with a smaller accountant, was a non-starter for now.
Joint audits were a top demand from several mid-tier firms and could still be included in the EU law. The Competition Commission will publish its full report next week and final, binding recommendations by mid-October.
The European Parliament’s legal affairs committee is due to vote on the bloc’s audit shake-up next month. (Editing by Elaine Hardcastle)