Bid to tackle accounting 'big four'

KPMG building

Competition chiefs have vowed to break up the cosy relationship between Britain's largest companies and the "big four" accounting firms.

The Competition Commission said the market for the external auditing of company accounts was restricted, with two-thirds of FTSE 100 companies using the same audit firm for more than 10 years.
It is looking at ways to encourage greater competition, including through mandatory tendering and rotation of audit contracts.

In presenting its provisional findings, the watchdog said it wants a situation where switching becomes the norm and auditors are less like corporate advisers and more like examining inspectors. The market is dominated by KPMG, Deloitte, Ernst & Young and PwC, with smaller firms unable to break their stranglehold because companies find it difficult to compare alternatives with their existing auditor.

Laura Carstensen, who chaired the inquiry group, said senior management at large companies were inclined to stick with what they know. She added: "Shareholders play very little role in appointing auditors compared to executive management - and despite the presence of audit committees and other safeguards, audit firms naturally focus more on meeting management interests. The result is a rather static market in which too often audits don't fulfil their intended purpose and thus fail to meet the needs of shareholders."

Two years ago, the industry was heavily criticised in a report by a House of Lords committee over conflicts of interest and the quality of published accounts in the run-up to the credit crunch.

The commission said it feared that the lack of competition was likely to lead to higher prices, lower quality and less innovation for companies.

But Richard Sexton, PwC's head of reputation and public policy, said the commission "grossly underestimated" the critical role that company audit committees play in protecting the interests of shareholders. He added: "We are very clear that we report to the shareholders and engage with the audit committee as their representatives."

The Competition Commission said it found no evidence of collusion among the big four firms or that they bundle audit and non-audit services together in order to raise the barriers to expansion to other firms. However, it stated that 31% of FTSE 100 companies and 20% of FTSE 250 firms have had the same auditor for more than 20 years. The regulator will now consider which proposals to take forward in a bid to improve competition in the sector.

The ICAEW professional accounting body pointed out that the UK audit and accounting sector contributed more than 1% of GDP and was the biggest single employer of graduates in the UK. Chief executive Michael Izza said: "It is therefore critical when looking at how these measures are implemented, that they do not undermine or destabilise what is such an important sector for the UK economy. They also need to be seen in an international context and be consistent with proposals currently being considered in Europe. Increasing market choice will only be possible if audit committees - who are responsible for appointing auditors - recognise that there is huge quality and talent to be had outside the big four accounting firms."

© 2013 Press Association
Read Full Story