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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

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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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