Greg Wright: These timid audit reform plans may not add up to much

A bold attempt to make auditing more competitive?

Or a half-hearted compromise that will not trouble the status quo?

The Competition Commission faced a thankless task when it was asked to consider ways of challenging the Big Four’s dominance of the accounting world.

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Yesterday, we learned that the commission had ditched its more radical ideas for shaking up the market, and may have left any tougher action up to the European Union.

But why should reform be necessary?

Auditors are under pressure to change how they operate because they gave the banks a clean bill of health just months before the financial crisis.

As we all know, a number of these banks had to be bailed out by the taxpayer.

Many people feel uncomfortable about the fact that the accounting market is dominated by just four firms – Deloitte, KPMG, PricewaterhouseCoopers and Ernst & Young. Heaven forbid, but what would the consequences be if the Big Four were reduced to the Big Three?

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The major reform proposed yesterday was that companies must put their audit work out to tender every five years.

At first sight, that seems like a tough line to take. It is a significant hardening of a new rule from the Financial Reporting Council (FRC), which had asked companies to consider putting their audit work out to tender once a decade.

However, the commission decided against forcing companies to switch auditor on a regular basis, or to require two auditors to check the books of a company.

It also did not impose more curbs on the type of advisory work an accountant can offer a company whose books it already checks.

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Smaller accounting firms like Mazars, BDO, Grant Thornton and Reeves have called for regulatory intervention to help them compete more effectively with the Big Four.

However, I detect what might be described as an absence of “joined-up” thinking here, because the commission could be overruled by a draft European Union law now undergoing approval – which means we could end up going right back to the drawing board.

Yesterday, Laura Carstensen, chairman of the Competition Commission’s audit market probe, said the Commission was aware that its proposed package may be affected by measures being discussed by the EU.

She added: “There are as yet no definitive EU proposals, and we have therefore proceeded on the basis of the evidence produced by our inquiry.”

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So the last word, it seems may lie with Europe. Observers outside the business world might regard this whole affair as rather curious. Why should the man or woman in the street care if virtually all the major UK companies are audited by just four firms?

Perhaps you should cast your mind back to 2010, when the financial meltdown following the collapse of Lehman Brothers was a very raw memory.

In that year, The Big Four were criticised by a House of Lords committee over conflicts of interest and the quality of published accounts.

The committee also said the failure of auditors to communicate regularly with regulators ahead of the banking crash of 2008/09 amounted to a “dereliction of duty.”

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Last year, the competition watchdog said its probe of the market for company audits had not uncovered any evidence of collusion among top accounting firms over market share.

The brutal fact is that the Big Four are so large that its impossible to see anybody challenging their dominance in the foreseeable future.

Recent developments, such as the merger between BDO and PKF, won’t have troubled them.

In terms of scale at least, the competition are some way behind.

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Professor Peter Moizer, the Dean of Leeds University Business School, told me recently: “There are three layers within the accountancy profession – the Big Four, the middle tier and the smaller firms.

“The middle is getting squeezed. It’s tough for them. The Big Five only became the Big Four because Arthur Andersen crashed out following the Enron scandal, it wasn’t brought about by a choice. From a competition perspective, the Big Four are almost too big to fail, as there is an element of competition between them. It’s a tough market and most of the money for the Big Four doesn’t come from audit, it’s the rest of the services.”

Market forces alone won’t allow a challenger to the Big Four to emerge. If regulators are serious about breaking this dominance, they must come up with something much more radical than yesterday’s proposals.