Mixed feelings as mid-tier
reacts to findings of EU Oxera report

Two audit firms using alternative practice structures say
allowing external capital investment into European audit firms
would be a good move, although a mid-tier firm says removing
invisible barriers would do more to increase audit choice.

The comments are in light of a 240-page report from consultancy
Oxera, which was published by the EC last month. It examined
ownership rules applying to audit firms, their corporate
structures, access to capital and the consequences such access
might have on audit market concentration. Information was drawn
from 56 surveys of companies, ranging from finance to food, as well
as 44 interviews, including 29 with audit firms. The report found
that relaxing ownership rules in European audit firms could create
new investment and entry opportunities into the international audit

‘Encouraging’ outcome

The potential of alternative ownership structures within audit
firms has been highlighted by the experience of UK firm Tenon Group
and US firm McGladrey & Pullen. Andy Raynor, chief executive of
Tenon, says the idea that there can be external involvement or
investments in audit practices is an “encouraging” outcome of the

“If the objective of opening up investment into audit practices is
to make sure there is greater choice in the market, my view would
be it can’t do anything except help,” Raynor told IAB. “I
think if you’re going to have businesses that are chasing the major
international corporations that are, at the moment, almost
exclusively the province of the Big Four, they are going to
[require] deep pockets to do so. That is because those businesses,
the Grant Thorntons or the BDOs of this world, are actually going
away from their natural client base.”

Tenon, a Morison International member firm, is an Alternative
Investment Market-listed accounting and business advisory company.
If Tenon acquires a new business with an audit arm, the audit
practice is separated out and held in Tenon Audit Limited. Audit
makes up around 10 percent of Tenon’s business, generating turnover
of around £13 million ($27 million) to £14 million.

Although this forms a small proportion of its overall fee income,
Raynor says the discipline of having an external investor is an
advantage. “I think actually that the corporate structure and the
discipline of having an external investor, whether it is external
shareholders or an individual external shareholder in private
equity, adds structure and there is a discipline which I think
actually improves the business,” he said.

McGladrey & Pullen, a US member firm of RSM International, runs
a separate audit practice to RSM McGladrey’s corporate tax and
consulting business, which is a subsidiary of the publicly listed
tax consultants H&R Block. Prior to creating its alternative
practice structure with RSM McGladrey in 1999, McGladrey &
Pullen’s revenue was approximately $300 million. The current
combined annual revenue for McGladrey & Pullen and RSM
McGladrey has since grown to approximately $1.4 billion.

Dave Scudder, managing partner at McGladrey & Pullen, says
access to capital helped the firm grow its business serving the
middle market since 2002. “I’m not sure we would have been able to
capture the market share from the changes in the US audit market
were it not for that additional capital and resources [available
through the alternative structure with RSM McGladrey],” he

Not all in agreement

However, not all partners speaking with IAB agree that
liberalising access to capital is the best way to improve choice in
the audit market. Grant Thornton’s head of external professional
affairs, Steve Maslin, said removing invisible barriers to entry
would do more to increase choice.

“It was almost as if the commission had decided that the best way
to increase auditor choice was to liberalise the ownership rules
but there’s no point dealing with the ownership laws until all the
perception issues and invisible barriers to entry are dealt with
first,” he said. “If the commission was successful in overcoming
some of these invisible barriers of entry to the audit market –
then in that scenario, we can see that it possibly would be a
worthwhile exercise to liberalise the ownership laws at that

Maslin explained that some of those invisible barriers include
removing the historical ties between intermediaries, such as
investment banks and the Big Four firms, giving shareholders more
involvement in the choice of auditors and improving the
transparency of audit reports.

Nicholas Moody