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May 24, 2012

Big Four-split not a solution to market concentration, BBC debate

Big Four firms are strongly opposed to being split up to re-create a Big Six as a solution to market concentration.

During a BBC Radio 4 programme, In business, Called to Account, anchorman Peter Day analysed the responsibilities of auditors during the financial crisis, addressing the Big Four concentration issue and the regulators’ approach to enhance quality, including the EC planned reform on audit, which includes, mandatory audit rotation, joint audits and ban on non –audit services to audit clients.    

KPMG UK chairman Griffith Jones said: “You can only have so many global players… The idea that braking Big Four firms would not affect quality is questionable.”

Big Four firms have come under fire for having audit contracts that run for many decades.

FTSE 100 companies’ representatives said the reason for such long tenures and Big Four concentration among listed companies is the international scope of these firms.

The FTSE 100 group said it supports the concept of mandatory retendering but thinks mandatory rotation would be difficult to achieve and costly, while potentially forcing a company to engage with an audit firm that does not understand its business.

BDO UK partner James Roberts said mandatory retendering would be an effective tool to allow mid-tier firms to enter the FTSE 100 market, which is currently inaccessible.

Institute of Chartered Accountants of Scotland president Sir David Tweedie believes the solution to market concentration will come “from a completely different direction”.

“When I first started at the International Accounting Standards Board, the American share of the global world’s equity capitalisation was 52%. Now it’s 31%.  Asia was 15%, now is 33%, with China being a big part of that,” Tweedie points out.

“In China, they have set up three huge accountancy institutes and I suspect China will be keen to build audit firms in the country and as their firms start spreading around the world they’ll start looking for links with the Anglo-American firms and you could see then mid-tier firms start becoming the engine of that. This is how it will happen.”

Mid-tier networks are already partnered with China’s largest domestic firms and the Chinese Ministry of Finance is encouraging firms to merge and grow in size.

The auditors’ responsibilities

Regulators should look ahead at the future of the audit profession when legislating, instead of implementing rules that relate to the state of audit to date, Ernst & Young Managing Partner Assurance Hywel Ball said.

“Ultimately we have potentially lost an opportunity of actually looking to what should an audit be in the future. Regulators [instead] are looking at the quality of the audit how it has been for years and years,” Ball added.

On the same tone Griffith Jones said a greater forward-looking element should be added to audits to prevent another financial disaster.

“The auditors’ job is to report on the historical numbers and the historical numbers were not the problem [in the crisis]: the wave was coming from in front of us not from behind. The problems were in the business models and in the attitude to risk adopted,” KPMG chairman said. Changes are then needed in order to enable auditors to play a greater role in assessing risks taken by banks, KPMG chairman concluded.  

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