Greg Wright: Healthy sign as accountancy firms come under scrutiny

It’s a provocative question that needs answering.

Every industry benefits from having its inner workings exposed to the questioning gaze of an independent arbiter.

If, as seems likely, the Competition Commission launches an inquiry into Britain’s Big Four accountancy firms, we will all be better off.

I’m not questioning the ability or integrity of the Big Four, who employ thousands of people in Yorkshire.

But a vigorous, impartial probe will determine whether there is truly a level playing field in the world of auditing.

Why, you might ask, is it necessary to have an inquiry now?

Well, the Office of Fair Trading (OFT) believes the dominance of the sector by KPMG, Deloitte, PricewaterhouseCoopers and Ernst & Young has created barriers for rivals and made it harder for firms to switch auditors.

Many policymakers have highlighted the fact that the big accountancy firms gave the banks a clean bill of health just before they had to be shored up – in many cases at the taxpayers’ expense – during the financial crisis.

There are also deep-rooted concerns that the markets could be destabilised if one of the four went under.

Remember Arthur Andersen, which imploded in 2002? The Big Five suddenly became the Big Four.

Perish the thought, but how would the market respond to just having the “Big Three”? Choice would be severely restricted.

Last week, the OFT said it believed a Competition Commission inquiry “was the appropriate response to our long-standing competition concerns in the market”. A final decision will be made in six weeks.

All this chimes with developments overseas.

The European Union’s executive European Commission is set to publish draft legislation later this year to boost competition in the sector.

Perhaps unsurprisingly, the possible inquiry has been welcomed by firms in the accountancy world’s second tier.

James Roberts, a senior audit partner at BDO, welcomes the OFT announcement and believes the inquiry will be confirmed after the consultation period.

He told me yesterday: “We have long maintained that the competitive environment has been unhealthy, with the almost total dominance of the larger company audit market by the four largest firms.

“Ninety nine of the companies in the FTSE 100 were audited by the Big Four last year. Those companies change auditors only every 48 years on average.”

So what does Mr Roberts want the competition authorities to do?

He told me: “They could ban restrictive covenants in banking agreements, which require borrowers to appoint Big Four auditors, as well as introduce less restrictive ownership rules for audit firms, allowing freer access to capital and potentially opening up the audit market to new entrants.”

Mr Roberts said he believed that joint audits should be encouraged.

The Competition Commission could also propose that larger companies tender their audits periodically and be “more transparent” with their investors about that process, Mr Roberts argues.

The Big Four have said they’re happy to work with the Competition Commission if the need arises, although they believe the auditing market is already highly competitive.

These comments from Richard Sexton, PwC’s board member for Reputation and Policy, are a neat summary of their collective stance: “The companies we are dealing with are sophisticated buyers who thoroughly test the audit service, at least informally, on an annual basis.

“Audits are won and retained on the basis of quality, sector expertise, geographic coverage and value.

“Our competitors are highly active in pursuing new audit opportunities in all our areas of business.”

Despite these observations, I believe a Competition Commission probe can only be a good thing.

The fact that virtually all the FTSE 100 firms were audited by the Big Four does suggest that the mid-tier firms are struggling to make their presence felt.

This could, of-course, be due to the fact that the Big Four are better than their rivals.

If this is the case, then doubtless a Competition Commission study will come to this conclusion.

In order to be effective, the probe must have a global dimension and tie in with steps being taken to increase competition in Europe and beyond.

Exposing the audit profession to critical scrutiny will bolster public and investor confidence at a time when it is sorely needed.