Business Opinion: In 1989 there were eight big audit firms. Now as a result of mergers and the demise of Arthur Andersen in the wake of the Enron scandal there are four, writes John McManus
PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG dominate the global market for auditing the accounts of large listed companies. They audit all but one of the companies in the FTSE top 100 and no doubt hold similar sway over the larger stocks on the Dublin market and further afield.
Some would argue that while this is not perfect, it is an acceptable situation, given the level of investment required to provide an international audit to a large quoted company. There is also the issue of being big enough to take the hit should you make a mistake.
Not so says the UK's accountancy regulator, the Financial Reporting Council (think the Irish Auditing and Accounting Supervisory Authority but with some attitude), which has instigated a public consultation on the whole issue of choice in the UK audit market.
Two things are of particular concern to the Financial Reporting Council (FRC). The first is what happens if another of the big four firms leaves the market as a result of another Andersen-type episode, where the organisation's association with Enron led to a complete loss of confidence in the global firm.
The second is the extent to which one of the existing big players could use the threat of withdrawal from the market to ensure that it got its way in key regulatory issues.
Last week saw the publication by the Association of British Insurers (think the Irish Insurance Federation but with some backbone) of its response to the FRC discussion paper. The Association of British Insurers (ABI) is something of a player in the UK corporate governance debate, as it represents some of the largest investment institutions who are also some of the UK's largest listed companies.
Like the FRC, the ABI is also far from happy with the status quo which, it feels, will, in the long term, lead to a loss of quality through lack of competition.
It makes a number of suggestions that could lead to an improvement without any need for regulatory intervention. The most significant of these is that large companies should rotate their auditors more frequently. The ABI also suggests that big investors should make it clear that they do not automatically expect the companies they invest in to select one of the big four auditors.
While the ABI says its preference is for such non-regulatory intervention, it is also calling for a tougher approach from the competition authorities to underpin reform.
If one of the large firms is deemed to have an excessive share of the audit market it should be forced to divest part of its business, the ABI believes. It also wants the regulatory authorities to look into the the cross-subsidisation of audit work by lucrative consultancy work for the same client. The smaller firms have long suspected that this cross-subsidisation allows the big four quote for audit work at prices the second-tier firms simply can't match.
There is also the issue of the ability of second-tier firms to gear up to carry out such work. The ABI wants the constraints on audit firms raising outside capital reviewed, making it easier for them to develop the resources required for big international audits.
It would not be true to say that a debate has raged in the British media since the publication of the ABI response to the FRC. But given that we are talking about the regulation of the accountancy profession, what would you expect? There was, however, some exchange of views, mostly about whether a regulatory, rather than market-led approach was the way to go. The problems inherent in the lack of choice was taken as given. Strange then, or is it, that the issue does not appear to be of any concern to anyone over here.
The Irish Auditing and Accounting Supervisory Authority (IAASA) has been up and running for two years now and certainly could not be accused of being high-impact.
Its main policy initiative to date has been to instigate a public consultation on whether or not the use of the name "accountant" should be restricted by law. The pressure for this particular waste of taxpayers' money comes not from consumers or investors but from the profession itself. If there is one thing that can be said with certainty on this issue, it is that restricting the use of the name "accountant" will not bring down fees.
One can't help wondering whether if, as originally intended, the accountancy bodies had been restricted to two instead of five seats on the IAASA, the authority might have found something more relevant to look at, such as the dominance of the market by the big four audit firms for example.
