This coming Monday, April 30, London’s Centre for the Study of Financial Innovation is hosting an open public discussion – “The Future of Audit: Break Up or Shape Up?”
I am pleased to have a panelist’s seat.
Details and free sign-up are here. Mid-day timing is convenient – venue in the City at Armourers' Hall – wine and sandwiches served. Media are interested and will be there, but Chatham House Rule. Attendance is invited and welcome -- a lively time is promised.
Here’s the background: In late January Stephen Haddrill, chief executive of the Financial Reporting Council, Britain’s audit regulator, called for investigation of the audit market -- quoted by the Financial Times as telling a parliamentary committee that “we feel there should be more competition in the major accounting and audit area.” He extended his scope on March 16, proposing that “Britain’s Competition and Markets Authority should investigate the case for ‘audit only’ firms in an effort to bolster competition and stamp out conflicts of interest in the sector.”
The FRC’s strategic plan, released in March, doubled down on Haddrill’s advocacy (page 7):
“Competition – or lack of it – at the top end of the audit market remains a serious concern. As a regulator we cannot be content that just four large firms dominate the market for audit services.”
Public attention followed. The Financial Times on March 21 ran a “head-to-head,” in which Natasha Landell-Mills of asset manager Sarasin & Partners and I took opposite sides on a Big Four split-up. The FT published wide-ranging reader reactions, and the CSFI picked up the ball.
Careful moderating may keep the agenda on the rails. In the meantime, the FRC’s positions raise at least two serious issues.
First is the matter of its own record, on which Parliamentary attention has not been kind. The chair of the Commons business committee delivered the charge that the FRC was both “toothless” and “useless,” rounding on its attention to this winter’s collapse of outsourcing company Carillion, and a City grandee, Legal & General chairman Sir John Kingman, has been designated to lead a broad inquiry into the FRC’s performance, operations, governance and operations.
Whether the FRC deserves the epithets will abide Mr. Kingman’s inquiry. Meanwhile my own views are well recorded, that any attempts to split up or strip down the Big Four are doomed as ill-advised and ineffective to address the perceived issues.
Second and directly to the point, it is of no little irony that Mr. Haddrill’s lobbying on competition braced the March announcement by the UK firm of Grant Thornton – by size the fifth in the UK and in the network ranking seventh globally – that it would stop bidding for audit engagements among the FTSE 350, the UK’s large public companies.
On this shrinkage the FRC resoundingly scored an own goal, as the responsibility lies directly with its misguided 2012 requirement that UK public companies put their audits out for re-tender.
The consequences of that empirically unsupported initiative may have been unintended, but they were not unforeseen. As I blogged in August of 2013, while the regulators' timetable for mandatory re-tender was still to be fixed, these results could be expected:
“Mid-tier firms withdrawing from tenders for inability or unwillingness to sustain the impact on their personnel and their business models.
“Further intrusion of the Big Four into the client lists of the mid-tier firms, with resulting increase in the market concentration among that tetrapoly, based on their ability to deploy superior resources against uncertain defenses.”
As we will explore at the April 30 event, any further such tinkering by the FRC is hostage to the global scale on which multi-national audits are undertaken – even as its strategic plan concedes (page 18), “the FRC, like other audit regulators, has no authority over the audit firms’ international networks.”
In looking with concern and skepticism at the viability and sustainability of the current Big Audit model – including in my book, “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms” – I am not an apologist for the accounting profession or its members, who are legitimately answerable for the quality of their performance.
But if participants in the capital markets are genuinely interested in audits provided by private partnerships that will deliver single reports on the globally consolidated financial statements of their clients – with serious emphasis on the if – then discussion needs to be fact-based and focused on the market realities and the achievability of whatever steps may be offered.
Which said, please join us on the 30th.
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