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February 15, 2011

Leaders rally behind regulatory intervention

Mid-tier global audit firm leaders are united in a call for regulatory intervention to improve competition and reduce concentration in the audit market.

The global chiefs of BDO, Grant Thornton International, RSM International and Mazars told the International Accounting Bulletin that the “status quo” is no longer acceptable – a sentiment repeatedly echoed by EC Internal Markets Commissioner Michel Barnier today.

Yesterday, these four global firms issued a joint statement on the need for regulatory intervention, which is a departure from the previously held mantra that the market would be able to solve concentration problems alone.

They called for the abolition of Big Four lending clauses, the introduction of rules that require audit committees to regularly reassess audit appointments, and for regulators to pay more attention on mergers and acquisitions that further concentrate the audit market.

“We have all come together because there is a strong consensus for the need for change,” RSM International chief executive Jean Stephens said.

Striking the right balance

Grant Thornton International chief executive Ed Nusbaum explained that the audit industry is already heavily regulated and dynamising the market is a matter of finding a balance.

“I think that all four firms and others as well have many clients that want to engage us but are restricted because of restrictive governance that are imposed on them by banks and other outside parties,” he said.

“A part of this is about opening up free trade opening up the market place. Our profession is a regulated profession so regulatory intervention is something we are used to seeing so it is just a matter of what the level of regulatory intervention is.”

BDO chief executive Jeremy Newman said that in public interest entity work, audit firms are answerable to investors and that investor groups have “made it clear that they do want to see change”.

Big Four clauses must go

Of the proposals put forward by the quartet, banning Big Four lending clauses would appear to be the easiest change to implement, although Newman points out that he has been calling for this for several years.

“I thought it would be easy, its five years later and we are still discussing them and there are still people who question whether they exist or not,” he said.

The regular reassessment of auditor appointments is an attempt to improve transparency, corporate governance and allows audit committees an opportunity to assess other firms in the market.

Mazars chief executive and president Patrick De Cambourg said there is evidence that regular reassessments lead to more voluntary firm rotation.

“In the beginning you are called you are listened to not necessarily with great attention and then the next time you are listened with more attention and then the following time you are retained – that happens all of the time.”

The mid-tier leaders stress that a periodic review is not the same as mandatory rotation, which most firms are against.

“We are not suggesting companies be forced to change auditor but simply a periodic review of whether or not the company has the right firm and the right match be would be beneficial,” Nusbaum said.

Placing watchdogs on alert

One area that is a sore point for the mid-tier is their firms being snapped up by the Big Four. A recent high profile case occurred in Brazil last year when Ernst & Young acquired Grant Thornton’s previous member Terco, the fifth largest firm.

“If there is too much concentration in the market, step number one is not to increase it,” De Cambourg said.

“To a certain extent the move that has been made by a number of dominant players in order to pick up firms in one country is just increasing the problem instead of solving the problem.”

The quartet would like competition watchdogs to police large mergers and acquisitions that concentrate the market even further. It is hoped the EC can set an example among its G20 peers by providing safeguards that prevent such M&A activity.

The unified nature of these proposals is a major step forward for non-Big Four firms as they attempt to improve choice in the market.

“From my perspective it is more about addressing this attitude that there are a limited number of firms that can do certain work and really addressing and hitting it head on,” Stephens said.

One thing is abundantly clear to the group, four voices are louder than one. It will be interesting to see if decision makers heed their call.


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