Rivals to the “big four” accounting firms have applauded regulators for taking a more aggressive stance on inadequate competition in the UK audit market.
The UK’s Competition Commission yesterday confirmed that it was considering a broad range of measures to dilute the dominance of PricewaterhouseCoopers, Deloitte, KPMG and Ernst Young.
After an investigation lasting more than a year, it provisionally found that a lack of competition in the market for big audits was probably inflating prices, while also damaging audit quality and innovation.
Laura Carstensen, who chaired the investigation, said: “Too often audits don’t fulfil their intended purpose and thus fail to meet the needs of shareholders.”
The regulator said auditors were not sufficiently independent from the managers whose accounts they were supposed to be vetting. Investors – the auditor’s nominal customer – were too often neglected because they only played a small role in appointing audit firms compared with that of management, it added.
Most audits were performed diligently, Ms Carstensen said, but misaligned incentives meant that “auditors tend to focus on management interests over those of shareholders”.
Shareholder interests
“Management may have incentives to present their accounts in the most favourable light whereas shareholder interests can be quite different.”
Auditors needed to be “less like corporate advisers and more like examining inspectors”, she concluded.
Mazars, one of the firms that wants to pick up big contracts from the leading quartet, called the regulator’s provisional findings “a clear indictment” of the market for FTSE 350 audits.
It said the commission’s findings would influence reforms being drawn up for the entire EU. Grant Thornton and BDO, two other second-tier firms, also welcomed the findings.
The big four denied that auditors were too cosy with executives at client companies.
Richard Sexton, head of reputation and public policy at PwC, said: “We believe that the Competition Commission have grossly underestimated the critical role that audit committees play in protecting the interests of shareholders.” – (Copyright The Financial Times Limited 2013)
