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Big Four accountants 'insufficiently independent and sceptical' of City Big four accountants 'insufficiently independent and sceptical' of City
(35 minutes later)
Companies are overpaying for lower quality audits from the "Big Four" accountancy firms because of a lack of competition, according to the Competition Commission. Companies are overpaying for lower-quality audits from the "big four" accountancy firms because of a lack of competition, according to the Competition Commission.
The commission's review into how KPMG, PwC, Ernst & Young and Deloitte audit 90% of UK-listed blue-chip businesses said they are "insufficiently independent from executive management and insufficiently sceptical in carrying out audits". The review into how Ernst & Young, Deloitte, KPMG and PwC, audit 90% of UK-listed blue-chip businesses said they were "insufficiently independent from executive management and insufficiently sceptical in carrying out audits".
While the commission found no evidence of collusion between the four, it said there is a restricted amount of competition in the market. As a result "companies are offered higher prices, lower quality and less innovation" than would be the case in a more competitive market. While the commission found no evidence of collusion between the four, it said there was a restricted amount of competition in the market. As a result "companies are offered higher prices, lower quality and less innovation" than would be the case in a more competitive market.
It attacked the cosy relationship between auditors and senior management at City firms, who are often alumni of the Big Four themselves. High-ranking members of Big Four firms also sit on many company boards. It attacked the cosy relationship between auditors and senior management at City firms, who are often alumni of the big four. High-ranking members of big four firms also sit on many company boards.
The commission said auditors are more focused on satisfying management, who decide which auditor to appoint, rather than shareholders. This could lead them to accommodating efforts by a company's management team to present accounts in an unduly favourable light, it said. The commission said auditors are more focused on satisfying management, who decide which auditor to appoint, rather than shareholders. This could lead them to accommodating efforts by a company's management to present accounts in an unduly favourable light, it said.
That provoked a prompt denial from Ernst & Young. "We disagree strongly with the Competition Commission when it says that the audit market is not serving shareholders," it said and criticised the commission for failing to mention the role of independent directors on management boards. That provoked a denial from Ernst & Young. "We disagree strongly with the Competition Commission when it says that the audit market is not serving shareholders," it said and criticised the commission for failing to mention the role of independent directors on management boards.
"We think the somewhat stark description in black and white terms of the role and power of the finance directors and their motives does not represent the real world as we experience it. "We think the somewhat stark description in black-and-white terms of the role and power of the finance directors and their motives does not represent the real world as we experience it. In addition, we believe that competition between audit firms is healthy and robust and that the evidence supports this."
"In addition we believe that competition between audit firms is healthy and robust and that the evidence supports this." The Competition Commission does not want to break up the four accountancy firms, which also provide a wide range of non-audit services to their clients, but said it is looking into measures to reduce their stranglehold over the UK's largest companies.
The Competition Commission does not want to break up the four accountancy firms – which also provide a wide range of non-audit services to their clients – but said it is looking into measures to reduce their stranglehold over the UK's largest companies. That could include a ban on "Big Four-only" clauses in loan documents from banks and giving shareholders a greater say in the choice of auditors. Firms could also be ordered to rotate between auditors and invite other firms to tender for work on their accounts. That could include a ban on "big four-only" clauses in loan documents from banks and giving shareholders a greater say in the choice of auditors. Firms could also be ordered to rotate between auditors and invite other firms to tender for work on their accounts.
Grant Thornton, which has been trying to break into the audit market, welcomed the findings of the review: "Investors have consistently raised concerns over excessively long tenures and of a lack of diversity of audit service providers used by FTSE 350 companies. The Competition Commission's provisional findings confirm that the needs of shareholders and investors are not currently being best served and that there are other firms who are already well placed to compete in the market." Grant Thornton, which has been trying to break into the audit market, welcomed the findings of the review: "Investors have consistently raised concerns over excessively long tenures and of a lack of diversity of audit service providers used by FTSE 350 companies.
The investigation, ordered in 2011, was partly prompted by a House of Lords inquiry which found that listed companies, which must have their annual reports signed off by an auditor, use the same accountant for an average of 48 years, a figure the Big Four dispute. The fear is that auditors become less sceptical over time about what clients tell them. "The Competition Commission's provisional findings confirm the needs of shareholders and investors are not currently being best served and that there are other firms who are already well placed to compete in the market."
The investigation, ordered in 2011, was partly prompted by a House of Lords inquiry that found listed companies, which must have their annual reports signed off by an auditor, use the same accountant for an average of 48 years, a figure the big four dispute. The fear is that auditors become less sceptical over time about what clients tell them.
There was also anger that accountants gave banks a clean bill of health just before taxpayers had to rescue them during the financial crisis.There was also anger that accountants gave banks a clean bill of health just before taxpayers had to rescue them during the financial crisis.
The inquiry has looked at issues such as the gap between the Big Four and mid-tier firms, barriers to entry and expansion for smaller firms, and cites the case of Arthur Andersen, which collapsed after it was implicated in the Enron scandal, as showing that size does not guarantee stability. The inquiry has looked at issues such as the gap between the big four and mid-tier firms, barriers to entry and expansion for smaller firms, and cites the case of Arthur Andersen, which collapsed after it was implicated in the Enron scandal, as showing that size does not guarantee stability.
The Big Four's audit and advisory income easily outstrips their smaller rivals. In the financial year ended 2011, the audit income for the four largest firms ranged from £403m to £893m, compared with £133m for the largest mid-tier company. The Big Four have insisted competition is strong, pointing to downward pressure on fees. The big four's audit and advisory income easily outstrips their smaller rivals. In the financial year ended 2011, the audit income for the four largest firms ranged from £403m to £893m, compared with £133m for the largest mid-tier company. The big four have insisted competition is strong, pointing to downward pressure on fees.
The European Union has drafted a law which proposes mandatory switching or rotation of auditors every six years and even a cap on market share. The US audit watchdog has also aired plans for auditor rotation. The EU has drafted a law proposing mandatory switching or rotation of auditors every six years and even a cap on market share. The US audit watchdog has also aired plans for auditor rotation.