Unknown auditors in our backyard - not very likely
The UK’s Financial Reporting Council’s (FRC’s) Market Participants Group (MPC = a group of company directors, investors, bankers and accountants) has called on all audit firms to disclose the financial results of their statutory audits in order to improve competition and choice in the UK audit market.
Since October 2006 this group has been working on coming up with recommendations helping the UK’s accounting regulator to tackle global dominance of the top auditors.
Choice in the UK Audit Market: Market Participants Group (MPC) Appointed
The four big global accounting firms (PwC, KPMG, Deloitte, Ernst & Young) audit all the top 100 Footsie (= Financial Times Stock Exchange 100 (UK stock index)) companies between them. This cannot be healthy - and will get worse if the next scandal wipes out another firm.
As well, today’s oligopoly could push audit prices higher and encourage laxity and even threaten financial stability. Of course, large firms need large auditing firms because their operations span many countries and require a depth of expertise in each of these countries. Having an auditor with offices in all of them can make things easier.
Unfortunately, even small companies are often willing to pay the higher fees of one fo the four big global accounting firms.
To change things, the FRC’s MPC has come forward with the following 15 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.
3. In developing and implementing policy on auditor liability arrangements, regulators and legislators should seek to promote audit choice, subject to the overriding need to protect audit quality.
4. Regulatory organisations should encourage appropriate participation on standard setting bodies and committees by individuals from different sizes of audit firms.
5. The FRC should continue its efforts to promote understanding of audit quality and should promote greater transparency of the capabilities of individual audit firms.
6. The accounting profession should establish mechanisms to improve access by the incoming auditor to information relevant to the audit held by the outgoing auditor.
7. The FRC should provide independent guidance for audit committees and other market participants on considerations relevant to the use of firms from more than one audit network.
8. The FRC should amend the section of the Smith Guidance dealing with communications with shareholders to include a requirement for the provision of information relevant to the auditor selection decision.
9. When explaining auditor selection decisions, Boards should disclose any contractual obligations to appoint certain types of audit firms.
10. Investor groups, corporate representatives and the FRC should develop good practices for shareholder engagement on auditor appointment and reappointments and should consider the option of having a shareholder vote on audit committee reports.
11. Authorities with responsibility for ethical standards for auditors should consider whether any rules could have a disproportionately adverse impact on auditor choice when compared to the benefits to auditor objectivity and independence.
12. The FRC should review the Independence section of the Smith Guidance to ensure that it is consistent with the relevant ethical standards for auditors.
13. Regulators should develop protocols for a more consistent response to audit firm issues based on their seriousness.
14. Every firm that audits public interest entities should comply with the provisions of the Combined Code on Corporate Governance with appropriate adaptations or give a considered explanation if it departs from the Code provisions.
15. Major public interest entities should consider the need to include the risk of the withdrawal of their auditor from the market in their risk evaluation and planning.
The suggestions by the MPG are now opened for consultation. Get the complete interim report here:
- 2007-04-27 - Interim Report of Market Participants Group as part of Audit Choice Project
_PS._
Company directors, specifically audit committees, have the power to open up the audit market. Unfortunately, asking a group of blue-chip directors if they would support the appointment of a mid-tier auditor for their own company, the answer is no. There are almost no examples of a large enterprise switching from the big four to the likes of GrantThornton or BDO. For instance, among the UK’s top 350 firms, BDO has just one client.
Worst is that even mid-size firms have gone the route of choosing one of the four largest audit firms even though their limited global activities would surely not require this. Examples are not-for-profit entities in Switzerland or non-government organizations (NGOs).
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