The Financial Reporting Council has set up (yet another) committee to sift through responses to the April Oxera report into audit market competition. Why it’s taken 6 months to reach this point is beyond me but that’s the pedestrian nature of our profession I guess.
The responses make interesting reading. As might be expected, the Big 4 see no problem. Investment groups are far less sure while representatives from the Tier-2 players are lobbying for a piece of the action. In response to the central question:
We invite views on how the propensity of companies and their audit committees to purchase audit services from non-Big Four firms could be increased:
Some respondents did suggest focusing the debate on specific steps. These included: entirely
deregulating the audit market; ‘eliminating’ the Big Four from the audit market; prohibiting large audit firms from providing any non-audit services to any public interest entity; and allowing other professions and organisations to undertake audit work.
There are several problems. It is clear that investor groups are concerned about restricted choice and the potential threat of one or more of the Big 4 exiting the market. In the context of the report, such exit is couched in terms that indicate such a move would be voluntary. This is nonsense. Given recent results reported by the Big 4, not one of them will give up what they see as a piece of an incredibly lucrative pie. More likely, problems in the US, which the report acknowledges could disrupt, need attention now.
Where the report misses out is on a deep discussion on the question of quality. There are plenty of suggestions on the table but none are going anywhere. While it is assumed the Big 4 are better qualified than the rest, for unstated reasons, the fact is that more mis-statements are being reported in the US under Sarbanes-Oxely than ever before. If that’s a quality indicator then there are clearly problems way beyond those being discussed.
I see potential for specialist technologies to provide a great deal of the testing grunt work needed in today’s modern large scale audits. These systems could be developed in conjunction with the Big 4 – they have the expertise to at least get this going – which would have a dramatic impact on the need for massive teams of trained staff. That would open the door for firms to specialise in industry segments in an effort to raise standards.
But over arching this, I believe firms should divide so that audit is split from non-audit work. It is clear the Big 4 are conflicted. You only have to look at their position on important issues around tax avoidance to see that tax relies on access to audit papers in order to figure ever more ingenious schemes. This could be compensated for by the creation of proper rather than sham international firms. That in turn would bring pressure to bear on firms to be much more transparent and accountable than they are today.
My fear is that after 6 months of navel gazing, the FRC will spend another 6 months to a year just trying to figure out how it can come up with workable solutions that will satisfy the market, reduce the risk to investors and give Tier 2 players a chance of grabbing at least some of the crumbs. Whatever happens, it’s an unenviable task given the complexity of the problems facing the profession.
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