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August 12, 2010

UK parliament to probe dominance of Big Four in audit market

An inquiry into the dominance of
the UK audit market by the Big Four accounting firms has been
launched by the House of Lords Economic Affairs Committee.

Lords Economic Affairs Committee
chairman John MacGregor said the auditing industry is currently
dominated by a very small number of players and the inquiry will
look at ways to promote greater competition.

PricewaterhouseCoopers (PwC) and
KPMG have both welcomed the inquiry.

“The issue of market concentration
is one that has been around and touched on for a long time but it
will be good to have a real debate so we can demonstrate the level
of competition that actually exists in the market place,” said PwC
public policy and regulatory affairs head Pauline Wallace.

Wallace told International
Accounting Bulletin
that PwC does not feel it operates in an
uncompetitive market place.

“It is right to think the Big Four
have the FTSE 100 audit market and that is largely because these
are global companies who have chosen auditors who have global
networks and this is all a matter of choice. Nobody forces anybody
to come to PwC or KPMG or any of the other firms,” she said.

FTSE 250 more
competitive

Wallace said the FTSE 250 is a very
different market place.

“If you look at the FTSE 250, there
is a much greater spread of audit firms and we compete with all
sorts of people at that level,” she said.

“Some people choose to come to PwC
but not everybody does and I think that demonstrates that there is
quite a competitive market place out there. I would be surprised if
you looked below the FTSE 100 and saw the same concentration of
four firms.

“I think [the inquiry] needs to
focus on what it is the Big Four dominates if it does truly
dominate.”

The inquiry plans to establish
whether the dominance of PwC, Deloitte, KPMG and Ernst & Young
in the audit market contributed towards a failure to pick up
unsustainable risks banks were taking leading up to the global
financial crisis.

Wallace said the same questions
should be asked of regulators or bank management.

“We are part of the whole process
of detection but we are not the only ones,” Wallace said, adding
that the disclosure of risk before the financial crisis was not as
good as it should have been.

“If you pick up a financial
statement you will find there is stuff all over the place about
risk. It is not in one place, so even just simply pulling it
together in one place would improve the quality of the information
that is provided and ensure there is consistency.

“If management was willing to
contract us to do it we could also provide greater assurance around
risk, which is also worth looking at.”

Wallace said firms could provide
additional assurance if investors wanted it but companies would
incur further costs and a cost benefit analysis would have to be
done.

Audit quality

The committee will also look at
whether market concentration affects the quality of audited
accounts and if there are conflicts of interest between auditing
and business consultancy services provided by the Big Four.

Wallace doesn’t think there are
conflicts of interest because most of PwC’s consultancy work is
provided to entities other than audit clients.

“There are some types of
consultancy work that you would not provide to your audit clients
because there would be independency issues,” Wallace noted.

“We run a business and businesses
do need investment so we do need to ensure we have the ability to
generate revenue through different services that we can then
reinvest in the things that matter such as audit quality.”

This is not the first, nor likely
to be the last, time audit market concentration has been in the
spotlight but all previous attempts to improve choice have yielded
little results.

Last month, the UK Financial
Reporting Council said audit concentration is a major concern for
the watchdog more than two-and-a-half years after its market
participants group issued recommendations to increase audit
choice.

The deadline for submitting
evidence to the parliamentary inquiry is 24 September 2010.

 

Related
articles


FRC says audit concentration remains a risk


Audit concentration remains a concern for UK watchdog


Report calls for continued monitoring of audit market
concentration


FRC keeps an eye on consulting growth

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